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95th Congress 1 COMMITTEE PRINT 

1st Session / 



1978 FOOD AND AGRICULTURAL OUTLOOK 



Papers Presented at the Food and Agriculture Outlook 
Conference Sponsored by the U.S. Department 
of Agriculture — Held in Washington, D.C., 
November 14-17, 1977 



PREPARED FOR THE 

COMMITTEE ON AGRICULTURE, NUTRITION, 
AND FORESTRY 
UNITED STATES SENATE 



DECEMBER 19, 1977 



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Vc/V Panted .f<iR^fe|^se of the 
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and Forestry 



95 ls h t Session S } COMMITTEE PRINT 



1978 FOOD AND AGRICULTURAL OUTLOOK 



Papers Presented at the Food and Agricultural Outlook 
Conference Sponsored by the U.S. Department 
of Agriculture — Held in Washington, D.C., 
November 14-17, 1977 



PREPARED FOR THE 

COMMITTEE ON AGRICULTURE, NUTRITION, 
AND FORESTRY 
UNITED STATES SENATE 



DECEMBER 19, 1977 



Printed for the use of the 
Committee on Agriculture, Nutrition, and Forestry 



U.S. GOVERNMENT PRINTING OFFICE 
98-723 WASHINGTON : 1977 



COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY 



HERMAN E. TALA 
JAMES 0. EASTLAND, Mississippi 
GEORGE McGOVERN, South Dakota 
JAMES B. ALLEN, Alabama 
HUBERT H. HUMPHREY, Minnesota 
WALTER D. HUDDLESTON, Kentucky 
DICK CLARK, Iowa 
RICHARD B. STONE, Florida 
PATRICK J. LEAHY, Vermont 
EDWARD ZORINSKY, Nebraska 
JOHN MELCHER, Montana 



GE, Georgia, Chairman 
ROBERT DOLE, Kansas 
MILTON R. YOUNG, North Dakota 
CARL T. CURTIS, Nebraska 
HENRY BELLMON, Oklahoma 
JESSE HELMS, North Carolina 
S. I. HAYAKAWA, California 
RICHARD G. LUGAR, Indiana 



Michael R. McLeod, General Counsel and Staff Director 
Henry J. Casso, Chief Economist 
Carl P. Rose, Counsel 

James W. Giltaiier, Professional Staff Member 
William A. Taggart, Professional Staff Member 
Reider J. White, Professional Staff Member 
Dale L. Stansbury, Economist 
Phillip L. Fraas, Assistant Counsel 
Stephen E. Storch, Assistant Counsel 
Stuart B. Hardy, Professional Staff Member 
Karen J. Schubeck, Budget Officer 
Dale Siierwin, Professional Staff Member 
W. Glenn Tussey, Economist 

Nelson Denlinger, Chief Clerk and Press Secretary 

E. Morgan Williams, Professional Staff Member 

Betty M. Mason, Clerical Assistant 

Helen A, Miller, Clerical Assistant 

Laura D. Rice, Legal Assistant 

Denise A. Love, Hearing Clerk 

Maureen T. Burke, Clerical Assistant 

Diane G. Covington, Finance Secretary 

Jo P. Miller, Clerical Assistant 

Marilyn Nickoloff, Clerical Assistant 

Julia B. Platt, Clerical Assistant 

Delores A. Flowers, Clerical Assistant 

Koni L. Gleason, Clerical Assistant 



(ID 



FOREWORD 



The annual Outlook Conference, sponsored by the U.S. Department 
of Agriculture, convened in mid-Xovember under a new title that is 
appropriate to its expanded program and the broader audience these 
forums have recently been attracting. The 1978 Food and Agricultural 
Outlook Conference was designed to reflect this wider recognition of 
the agricultural outlook's critical implications for all Americans, both 
as consumers and as concerned citizens. 

The new attention to such subjects as family diets, natural resources, 
and environmental impacts was matched by efforts to enhance the value 
of the Conference to those who produce, process, and market our food 
and fiber products. Special briefings on weather and world agriculture 
were presented so as to put into perspective the latest analyses of recent 
developments, emerging trends, and supply and demand prospects for 
the coming year. 

Of course, the recently signed Food and Agriculture Act of 1977 
generated particular concern at this year's Conference because of its 
implications for producers and consumers. The new concepts of farm 
program acreage and the acreage allocation factors, combined with 
prospects for heavy use of USDA price support programs and higher 
direct payments to farmers under the Act, gave this year's program an 
unusually high profile. 

The usual uncertainties facing producers also demanded special 
consideration. Even with another year of strong exports and expanding 
domestic markets, large U.S. supplies of agricultural products will be 
more than offsetting. While for consumers, this indicates a relatively 
favorable retail food price picture in coming months, it does not pro- 
vide a basis for any farmer optimism. Farm prices are expected to 
continue relatively weak, and farm income may be down from 1977. 

In the interest of providing the members of the Senate Committee on 
Agriculture, Nutrition, and Forestry, the Senate, and the general pub- 
lic with timely information regarding the agricultural setting and 
outlook in 1978, I have asked that the papers presented at this year's 
Food and Agricultural Outlook Conference be published as a com- 
mittee print. While the views and analyses presented in these papers 
are those of the authors and not necessarily of the Committee or of 
USDA, the Committee nonetheless wishes to recognize these Confer- 
ence speakers as professionals and experts in their respective fields. 

Herman E. Talmadge, Chairman, 
(in) 



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CONTENTS 



Page 

Foreword in 

Conference Opening — by John C. White 1 

U.S. FARM AND FOOD POLICY IN THE WORLD 
OF THE SEVENTIES 

U.S. Farm and Food Policy — by Howard W. Hjort 7 

Toward A U.S. Food Policy — bv Carol Tucker Foreman 10 

U.S. Dietary Goals— by D. Mark Hegsted 21 

Establishing and Implementing Dietary Goals — bv Gilbert A. Leveille 26 

The Dietary Goals and Food on the Table— by Betty B. Peterkin 32 

U.S. OUTLOOK IN WORLD PERSPECTIVE 

The World Food Economy: A Developed Country View — by Geoff Miller__ 57 

The U.S. Economic Outlook in World Perspective — by Lvle E. Gramlev__ 61 

Trends in U.S.S.R. Agriculture— by Dr. Boris A. Runov 67 

World and U.S. Agricultural Outlook — bv J. Dawson Ahalt 69 

U.S. Agricultural Trade— by Thomas R. Savior 83 

FOOD— SUPPLIES, DEMAND, AND CONSUMPTION 

National Approach to Carcinogens — by David W. Huston for Hon. 

Barbara Hackman Franklin 93 

Consumer Concerns About Additives and Residues in Food and Fiber — 

by Dr. Robert Angelotti 97 

Additives: Why, When, What for— by Paul F. Hopper 102 

Concerns About Chemicals in Food and Fiber Production — by W T alter 

Wilcox *_ 109 

The Economic Outlook for Food — by Kenneth R. Farrell 114 

AGRICULTURAL INPUTS, FINANCE, 
AND PRODUCTIVITY 

The Weather— What About 1978?— by Richard E. Felch 131 

The W T inter Outlook and the Limitations of Long-Range Weather Fore- 
casting — by Donald L. Gilman 136 

Climate Changes — A Commentary — by William Gasser 140 

Outlook for Farm Inputs — by Robert D. Reinsel 144 

Outlook on Costs of Commodities — by Ronald D. Krenz 155 

Agricultural Finance. Situation and Issues — by John E. Lee, Jr 161 

Credit and Finance Outlook — by David Lins_l 171 

Farm Finance — Current Developments in Perspective — by Emanuel 

Melichar 179 

Issues Facing the Farm Credit Sj'stem — by George D. Irwin 189 

Pending Legislation for the Farmers Home Administration — by James E. 

Thornton 193 

(V) 



VI 



COMMODITY OUTLOOK 



The International Setting for Sugar and Sweeteners — by Robert N. P a se 

McConnell 201 

U.S. Sugar and Sweetener Outlook — by Thomas W. Little and Fred Gray. 205 

U.S. and World Cotton Outlook— by Russell G. Barlow 1_ 212 

Impact of New Legislation: A Farmer's Outlook — b}^ C. Hoke Leggett 227 

U.S. Oilseeds and Products Outlook — by George W. Kromer 230 

1978 Outlook for Tobacco— bv Robert H. Miller and Richard Hall 244 

Notes on World Tobacco Outlook — by B. C. Andrews 252 

U.S. Grain Situation — by James J. Naive 256 

Outlook for Livestock and Meat — by James E. Nix 270 

Cattle Situation and Outlook for 1978 — by Bruce A. Ginn 278 

Outlook for World Beef Production and U.S. Beef Imports — by John E. 

Riesz J 284 

Meat Animal Outlook — bv Ewen M. Wilson 287 

Outlook for Timber Products— bv Robert B. Phelps 290 

Outlook for Dairy— by Charles N. Shaw 298 

Outlook for Poultrv and Eggs — bv William E. Cathcart 305 

Outlook for Fruit and Tree Nuts— by Jules V. Powell 312 

Outlook for Vegetables and Potatoes — by Charles W. Porter 320 

FAMILY LIVING 

The Outlook for the Labor Force: Implications for Families — bv Deborah 

Pisetzner Klein 1 329 

Outlook for Metrication — by Michael F. Thompson 334 

Clothing and Textiles: Supplies, Prices, and Outlook for 1978 — by Annette 

Polyzpu 340 

Energy Extension Service — by Judith M. Liersch 348 

In-Home Energy Monitor: A Test of Consumer Response to Energy 

Information — by R. Bruce Hutton 353 

Consumer Products Efficiency and Labeling Program — by R. Nelson 

DuRant, Jr 357 



CONFERENCE OPENING 

(By John C. White, Deputy Secretary of Agriculture, U.S. Department of 

Agriculture) 



Fifty-six men, women, and children ate lunch an hour ago because 
of the hard work and pride of one American farmer. This event oc- 
curs three time a day, every day of the year. 

Today, less than 4 percent of our population feeds all 215 million 
Americans and countless millions around the world. This is a startling 
achievement ! It's unsurpassed anywhere in the world. 

But, it is a fact that many Americans take for granted. They seem 
to think that America's food flows from an eternal spring — that it is 
unending. 

Those of you here in Washington this week to participate in Out- 
look 1978 share our concern and don't take America's farmers, or the 
food they produce, for granted. 

On behalf of Secretary of Agriculture Bob Bergland, I am pleased 
to be able to welcome you to this annual conference. I am confident 
that you will be presented with information that will show how vital 
American agriculture is to our domestic economy and to the peoples 
of the world. I am also confident that you will share our belief that 
America's food and fiber system continues to be the United States' 
number one industry ! 

Times have changed in Washington. For the first time in U.S. his- 
tory an administration has set realistic objectives to guarantee the 
future of America's producers and the food and agriculture industry. 
We have put forward a comprehensive national food policy. This policy 
and other new initiatives are based on hard realities: 

We will maintain a healthy rural America with a strong family- 
farm oriented system of agriculture by moving aggressively to 
strengthen export markets for U.S. farmers. 

We are moving as rapidly as possible to develop new energy 
resources and promote energy conservation throughout the food 
and agriculture industry. 

We are committed to a major human nutrition research and 
education effort that will provide all people with needed infor- 
mation to eat more nutritious foods and upgrade their diets. 

We are making our domestic and foreign food assistance pro- 
grams responsive to the people they are designed to help. 
As President Carter said at Notre Dame earlier this year, "We know 
that the world cannot long exist one-third rich and two-thirds hungry." 

I'm certain that there will be several speakers during this conference 
who will talk in detail about the current situation facing farmers, so 
I'm not going to belabor the present serious problems or how we got 
into these problems. 



(l) 



2 



Those of you here today — particularly farmers — know what has 
happened in the last 5 years to net farm income, to commodity prices, 
to the costs of inputs. 

When you look at charts of these, it reminds me of a train going 
over the Continental Divide. But this administration got on the train 
as it headed through the valleys on the western slope. 

Since 1973, farm income has fallen precipitously. But we think we've 
bottomed out. It's still a very serious situation, but that doesn't mean 
we give up. We have to turn poor farm income around and we will. 

Harry Truman had a saying that if you can't stand the heat, you 
should get out of the kitchen. Well, I don't see farmers giving up. I 
can assure you that Bob Bergland isn't giving up either. 

In fact, we're encouraged that the outlook for commodity prices and 
net farm income is changing. 

It's changing because of several events. Look at the world grain situ- 
ation — the wet harvest conditions in Canada, the decreased production 
in the Soviet Union, Poland, and much of the Southern Hemisphere. 

Wo think there will be increased export demand for U.S. wheat, 
corn, and other feed grains. 

Look at cash commodity prices. Since June 13, wheat at Kansas City 
has increased 58 cents per bushel. That's more than just a seasonal 
adjustment. Since October 21, corn at Chicago has gone up 36 cents 
per busliel. Normally, the seasonal low for corn is in November, but it 
appears to have been on that date. Soybeans at Chicago have increased 
substantially — 88 cents a bushel since October 21. 

And, we are hopeful that there will be even greater increases. 

If we look at agricultural exports for the last fiscal year, they in- 
creased over $1 billion from fiscal 1976. The value of exports was $24 
billion. This was a healthy increase in volume, given the fact that 
prices have been depressed. 

There is a new realism in Washington and a much stronger commit- 
ment to farmers and all participants in the food and agriculture 
industry. 

The President, Secretary Bergland, and I believe that all policies 
and programs that are adopted during this administration must meet 
four crucial tests to be successful. 

They must : 

— be good for America's producers and help them make a better 
income or our policies will fail ; 

— be good for consumers and meet their needs for abundant food at 
fair prices or our policies will fail ; 

— meet our international commitments because food is the founda- 
tion for peace in the world ; and 

— meet the humanitarian goals of the United States for our citizens 
and people throughout the world. 

Wo believe our policies meet these tests, and we're putting these 
principles to work in the Food and Agriculture Act of 1977. 

The new law : 

— provides price support loans for our major commodities that will 
keep the United States competitive in world markets; 

— provides the mechanism to support farmers' income through 
(lefieiencv payments, that this year alone will total almost $1.2 
billion to wheat producers; 



3 



— establishes a 30-35 million metric ton food and feed grain reserve, 
primarily farmer owned and controlled. It will help farmers by 
effectively insulating substantial stocks from the marketplace, re- 
ducing downward price pressure. It will also provide protection to 
domestic and foreign consumers from bad harvests. It will allow 
the United States to be a dependable supplier of quality food and 
feed grains, even when our production declines because of weather. 
This reserve will help us avoid needless export controls and em- 
bargoes that lead to the loss of foreign markets and crucial sales 
for American producers ; 

— provides set-aside authority to bring production more closely in 
line with potential demand, so that farmers will produce for 
markets. We have announced a 20-percent set-aside on wheat; 
tomorrow we will announce our decision on feed grains ; 

— makes substantial revisions in the foreign food assistance pro- 
grams. It strengthens our commitment to use Public Law 480 as a 
major market development tool, not a surplus commodity dis- 
posal giveaway ; 

— broadens the research missions of the Department of Agriculture. 

It grants new authority to search .for and develop alternate energy 

resources for agriculture ; 
— mandates research priorities on human nutrition to make certain 

that we know as much as possible about the nutritional needs of all 

people ; and 

— reforms the food stamp program through the elimination of the 
purchase requirement and the tightening of eligibility stand- 
ards. It makes food stamps more available to our citizens who 
need them the most. 

In addition to the tools provided in the new law, the administration 
is moving with greater determination to : 

— expand market development programs abroad ; 

— liberalize and make more effective use of CCC credit in foreign 
sales : 

— complete the multilateral trade negotiations in Geneva and ad- 
vance the interests of farmers ; and 

— negotiate international commodity agreements and world food 
reserves. 

Since February 22, 1977, this administration has taken 10 separate 
administrative actions to assist American farmers. These include in- 
creasing commodity loan levels, lowering interest rates charged for 
commodity and farm facility storage loans, expanding the maximum 
amount available for farm loans, making commodity loans available on 
all farm-stored grains, and providing emergency drought and disaster 
assistance. 

To conclude my comments, I want to refer to the latest action by 
President Carter— the creation of the Cabinet -level Working Group 
on Food and Agriculture Policy that is headed by UST)A. 

In his announcement, the President summed up this administra- 
tion's position on food and agriculture policies. He said : 

This administration is determined to develop food and ag- 
riculture policies which help the people who need help the 
most, both in the United States and abroad. Our policy should 



4 



give producers the greatest possible access to foreign markets, 
while helping poor nations improve their own ability to pro- 
duce and distribute food. 

It would be very easy for me to stand before you this afternoon and 
say that we have all of the answers to farmers' problems. The fact is 
that we don't. 

But, we are strongly convinced that our approach to food and agri- 
culture, our approach to solving low farm income, our approach to 
providing all consumers with bountiful food supplies, and our ap- 
proach to meeting our international humanitarian commitments is the 
most workable. 

The critical problems plaguing farmers and ranchers today are 
being solved. It will take time for these new policies and programs to 
take hold and work. 

I ? m convinced that America's farmers are going to have a better 
income and a brighter future because of our policies based on reality, 
not rhetoric. 



U.S. FARM AND FOOD POLICY 
IN THE WORLD OF THE SEVENTIES 



U.S. FARM AND FOOD POLICY 

(By Howard W. Hjort, Director of Economics, Policy Analysis and Budget, 

USDA) 



I am going to be quite brief on the topic, "Food and Agricultural 
Policy in the World of the Seventies," and devote most of the time to 
discussing the rationale for the policies we now have. 

Anyone involved in farm policy has only to think back over the last 
few years to come to the realization that weather is the major source of 
year-to-year variability in world production. We tend to think of that 
variability in terms of grains and our attention often becomes riveted 
there. But it's also true for sugar, cotton, oilseeds and all the other 
crops. Extreme year-to-year swings in production on a world basis 
must be taken into account in policy formulation. It's a factor that we 
have no control over, which seems to say in policy terms that we should 
have programs which can accommodate that kind of variability, even 
though over the longer run, technology is the major determinant for 
increasing production. 

The Food and Agriculture Act of 1977 addresses both of these 
production determinants. The objective that we have been guided by in 
the development of the legislative program and in the initiatives taken 
by the administration was a rather simple one : to protect producers 
and consumers at home and abroad from natural and economic 
disaster. 

It carries with it a series of related policies and programs. First it 
reserves. If we don't have a reserve, we simply cannot be a reliable sup- 
plier in the world. The weather factor is just too important. The favor- 
able weather in 1976 led to a significant excess of grain which provided 
us with the opportunity to remove some of that excess from the market 
and into a reserve under rules and regulations for accumulating and 
releasing it. In late August we committed ourselves to a 30 to 35 million 
metric ton grain reserve, with nearly half wheat and about half coarse 
grains. A small amount of rice is also included. That reserve wall be 
in hand prior to the beginning of the 1978-79 marketing year. The 
commitment to a 17 to 19 million ton feed grain reserve was reaffirmed 
again late yesterday afternoon in connection with the feed grain set- 
aside announcement. 

The reserve, as I said, helps to insure that we Avill be a reliable world 
supplier. It is a hedge against export controls and will help prevent 
extreme fluctuations in prices. And in a long run context, neither ex- 
tremely high prices nor extremely low prices are advantageous to pro- 
ducers or consumers. 

The reserve concept was adopted and approved by Congress in the 
1977 act. It is the first time to my knowledge that the Government of 
the United States has had an explicit reserve policy. We are now part 

(7) 



s 



iof an international force working toward the adoption of that policy 
on an international scale. This is one of the major changes in the pro- 
grams and policies of today compared to those of yesterday. 

For the basic farm programs and policies in the Food and Agricul- 
ture Act of 1977 are not very different from those of the recent past. 
They arc basically an extension of programs operated since at least the 
mid-1960's. They continue the concept of setting the relationship of 
grain price supports in a manner so as to permit market forces to dic- 
tate if wheat should be used as a feed grain. We had been in that com- 
petitive position from 1964-65 through the fall of 1976. There was a 
brief aberration of that policy in the fall of 1976 which had to be cor- 
rected in this bill and in the policies of this administration. It wasn't 
a major consequence for that brief period when things were out of line. 
They are back in line again. 

Market price supports are higher in this bill but they are set at levels 
designed to permit us to continue to be competitive in world markets. 
We have to export to have a healthy agriculture. We have to export to 
have a healthy economy. The level is simply a judgment question. It ? s 
our judgment that a level of approximately $2 per bushel for corn, 
our major grain, is a level that permits us to maintain our competitive- 
ness in- international markets. That basic philosophy is the same with 
respect to cotton, other grains, and other commodities included in the 
bill. 

The law allows us some flexibility if we are wrong, and the U.S. is 
not competitive at the $2 loan for corn. The market will tell us by pric- 
ing close to that loan level. And if that occurs, the Secretary may 
reduce the particular market support level in any one year by 10 per- 
cent and never below $1.75 per bushel. I am hard pressed to find an area 
in the world or, I'll put it another way, I am hard pressed to believe 
that the weighted average world cost of production would be less than 
$1.75. 

The target price concept included in the 1973 act was continued in 
the 1977 act but the basis for tieing it to the cost of production was 
made more explicit. Congress had previously directed the Department 
of Agriculture to assess cost of production and that set of studies was 
used in the development of target price levels. The same components 
of production costs are used in establishing the target prices for all of 
the major commodities that were in the bill — cotton, wheat, corn, sor- 
ghum, barley and so on. The administration proposed that same con- 
cept, be used for soybeans, but that was not included in the final bill. 
This, I think, is the first time that the equity principle, if you will, has 
been employed on such a broad basis. 

There is another point on cost of production and target prices on 
which I find great confusion. Target prices are based upon cost of pro- 
duction but target prices do not cover cost of production. In arriving 
at target prices, as I said, the same components of cost will be applied 
to those commodities. But that is not the same tiling as saying that 
they provide protection and :i guarantee for covering all costs. They do 
not. Thai part of the philosophy of farm programs and policies is a 
continuation of what we've had over the years. The farm programs 
have no! been designed to provide a guaranteed income to the producer^ 
they've boen designed to provide protection against economic disaster. 



9 



There is room for market prices to operate in this program and I 
don't believe that target prices are going to create any major problems 
in terms of acreage shifts and so on. 

A couple of other changes were made with respect to allotments. In 
the past, what a grower could do depended upon what he had done in 
some historical period. That system provided a rigidity that frequently 
was not to the individual's best interest. So the idea of using the cur- 
rent year as the basis for the program instead of previous years was 
proposed and was accepted. This provides producers with more flexi- 
bility than any other legislation. So it doesn't really make any differ- 
ence if producers in 1977 shifted to soybeans and cut back on corn be- 
cause of market indications. They're not penalized for doing so in the 
1978 program if market forces and programs are such that he should 
increase his corn production relative to soybeans. He's free to do so. 

There is, in addition, a way a person can guarantee total protec- 
tion if he so chooses. With respect to USD A's series of other initiatives 
on an international scale, some of them are in the bill and some of them 
have been taken by administrative action. 

With respect to the bill itself, in terms of cost, the major item was 
the food stamp program, and in terms of pages, the major item was the 
research section. I'm not going to cover those at this time because our 
panel is going into them in detail. 



TOWARD A U.S. FOOD POLICY 



(By Carol Tucker Foreman. Assistant Secretary, Food and Consumer Services, 
U.S. Department of Agriculture ) 



Through most of history, the human struggle for food has been 
directed primarily at simply getting enough to eat. This lias led to 
Government food policies that have focused mainly on increased pro- 
duction, better means of food preservation, and improved systems for 
the transportation and distribution of food. 

Xow, Ave are at a point where we have achieved a high degree of 
success in satisfying our domestic needs for adequate production, pres- 
ervation, and distribution. Yet out of our very successes, new and 
troubling issues arise. 

Today, production in this country is so large and reliable that we 
are able to feed ourselves and a large portion of the rest of the world 
and use food sales to help balance trade deficits. Yet this has also 
meant that we have recurring surpluses and that producers have 
trouble surviving. 

Moreover, although millions of Americans are unable to get enough 
to eat without assistance, for millions of others nutritional problems 
are a result of consuming too much food. 

We have been so successful in using chemicals to increase produc- 
tion, retard spoilage and preserve foods that we must now be con- 
cerned with the health effects of chemicals themselves. 

We have become so dependent upon food processing and upon na- 
tionwide food distribution systems that the farm value of production 
bears little relationship to final costs of food. 

And finally, because domestic population growth is leveling off 
and urbanization has slowed down, the rate of increase in domestic 
demand for food — which has been growing dramatically for years — 
may be slowing down. 

We need to begin giving the most serious consideration to forging 
a new food policy — a policy that responds to the dilemmas facing us 
today in a changed world. What should such a new policy look like? 
Secretary of Agriculture Bob Bergland addressed this is£ue recently. 

The Secretary stated : 

We think this country must develop a policy around hu- 
man nutrition, around which we build a food policy for this 
count rv and as much of the world as is interested. And in that 
framework we have to fashion a more rational farm policy. 
We've been going at it from the wrong end in the past. 

The goal of this now policy sought by the Secretary would be to 
make available an adequate supply of safe, nutritious food at stable, 
reasonable prices while providing a fair return on investment to 

(10) 



11 



farmers, processors, and retailers, and decent wages to workers in the 
industry. The new policy would also be designed to provide for assist- 
ance to those at home and abroad who cannot afford the cost of a 
nutritious diet. 

I would like to share with you this afternoon my views about what 
a new food policy, built around the framework established by Secre- 
tary Bergland's statement, should look like. 

To design such a new food policy I believe we will have to consider 
at least six elements. 

First, we must determine what are people's nutritional needs, and 
what levels and types of production are necessary to meet those needs. 

Second, the policy must determine the scope of the role the Nation 
will choose to play in meeting international needs for food, as well as 
the means to be used. What portions will be done through trade, or 
through assistance? How much additional domestic production will 
be necessary to enable us to meet those needs ? 

Third, the policy must consider what measures are necessary to 
stimulate and sustain that level of production. 

Fourth, the policy must take into account the need to assure that 
food is available at a reasonable cost. 

Fifth, the policy must include means to assure that the food supply 
is safe and of high quality. 

Sixth, the policy must devise programs to assist those who cannot 
afford adequate food at market prices. 

I would like to discuss each of these elements with you in more 
detail. But first, I think it's necessary to observe that this new policy 
would involve change — including change in some of our existing pro- 
grams and policies. It is important that if such changes are made, the 
resulting burdens should be spread across the population to the 
greatest extent possible. It is unreasonable to assume that farmers or 
processors or any other segment of the population should have to carry 
all the burden of change. At a minimum, change will probably require 
provision of adjustment assistance to those who will have to modify 
their traditional way of doins: business. Further, consumer prices may 
increase as the costs of changes in processing and retailing are passed 
on. But. in the long run. the costs of a new system should be more than 
compensated for by increased efficiency and competition, reduced costs 
for advertising and some processing, more stable prices, a halt to the 
precipitous decline of modest-sized farms and perhaps most impor- 
tant, reduced health care costs as nutrition improves at home and 
abroad. 

Now, to the six elements of the new policy. 

I. THE DETERMTXATTOX OF XUTRTTIOX'AE XEEDS 

First, a food policy should be based on a detailed assessment of what 
the nutritional needs of the people are. To even begin to develop a food 
policy, we must first know what persons in various age. sex. racial and 
ethnic groups, lifestyles and geographic locations need nutritionally 
for optima] growth and performance and continued well being. Deter- 
mining these needs will require a commitment to increased human nu- 
trition research. A small program of nutrition research has been car- 



9S-723— 77 2 



12 



ried out in the United States since the 1870's but we still do not have 
adequate answer? to some of the most basic questions. 

For example, the recommended daily allowances of various nutrients 
are widely used, but are often of limited value in helping a person select 
:i proper diet suited to particular stages of life and level of physical or 
mental activity. For some nutrients— such as some trace minerals— so 
little reliable data exists that no RDA at all has been established al- 
though the nutrients may be essential to good health. 

We also need research*on the relation of diet to disease. It now ap- 
pears that 6 out of the 10 leading causes of death in the United States 
may be degenerative diseases whose onset may to some degree be re- 
lated to nutritional factors. Some recent studies have linked various 
nutritional factors to cancer. 

At the same time, we need to learn more about the nutritional conse- 
quences of our increasing reliance on convenience foods, processed 
foods, and eating away from home. 

To forge an effective food policy, we will need not only to increase 
our knowledge of nutritional requirements — but also to determine what 
levels and types of production are necessary to meet these needs. This 
will require an ability to translate nutritional needs into production 
terms. We should know, for example, how much wheat and what kinds 
of wheat should be produced to insure people with adequate levels of 
B vitamins. It is also important that we know what nutrients are avail- 
able at consumption after processing. Naturally occurring vitamins 
change when wheat is milled. We will need to know if the vitamins can 
be replaced by fortification. These and similar assessments will have to 
deal with the combinations required to provide the necessary nutrients 
in diets as consumed, not just as generated in the laboratory. 

II. THE U.S. ROLE IN FEEDING THE WORLD 

The second element of a national food policy is the role the United 
States chooses to play in meeting international food and nutrition 
needs. The Federal Government must determine what portion of this 
will he done through trade, what portion through assistance, and how 
much additional production is necessary to meet those needs. 

The 1977 Farm Act calls for a domestic grain reserve system. It 
also encourages the Secretary of Agriculture to "enter negotiations 
with other nations to develop an international system of food re- 
serves" for humanitarian relief. Participation in an international 
emergency food reserve is crucial if the United States is, to live up 
Id its international obligations. It can also demonstrate that partici- 
pation in such a system will not ruin domestic farm prices or destroy 
foreign food markets. 

But Hie complexify of international food issues demands more than 
erye system. Through Public Law 480, amended slightly by the 
K»77 act. the Federal Government has for 23 years used UlS. "farm 
product ion as both a means of developing foreign markets for U.S. 
goods and as a means of providing food aid. A national food policy 
musi determine how to balance the needs of hungry people abroad 
with the needs f >f American producers eager to find new markets. We 
cannot allow overemphasis on one to undercut the importance of the 



13 



other. Nor can we permit political consideration to determine where 
we provide decent assistance. 

Maintaining good, stable trade relationships is extremely impor- 
tant. It is clear that a vigorous trade program is essential to keeping 
stability in our balance of payments. In addition, stable relationships 
protect American farmers — and consumers — from the fluctuations of 
a speculative market in food exports. We must strive to avoid the cir- 
cumstances that have led in the past to pressures for embargoes on 
food exports. The embargoes of soybeans in 197-1 and wheat in 19 1 5 
benefited no one. Trading partners and farmers were hurt. No dis- 
cernible benefits accrued to consumers. Embargoes are basically an 
admission of policy failure; and in an economy like ours, in which food 
is the keystone, we cannot afford such failures. 

One final point: Although America's capacity for food production 
is unparalleled in the world, we cannot permit the need to sell Ameri- 
can food abroad to destroy the incentive for other less developed na- 
tions to become more self-reliant in food production. The United 
States cannot base its entire food economy on exports. 

III. STIMULATION OF ADEQUATE PRODUCTION 

The third element of a basic food policy is to stimulate and sustain 
production adequate to meet domestic and international nutrition 
needs, and our country's trade needs. 

In one sense, this does not represent a major departure from the 
policies we have followed for a number of years. Government policies 
have long encouraged certain kinds of production and marketing, 
and discouraged others through support prices, research, and regula- 
tion. Government production policies have never benefited all pro- 
ducers equally. Livestock growers, for example, are not covered by 
support programs. Fruit and vegetable producers are only sporadi- 
cally covered by Federal and State marketing orders. Federal Gov- 
ernment actions have always helped some areas of agriculture at the 
expense of others. Support programs leading to higher feed grain 
prices, for example, hurt livestock producers. 

What a new food policy must do is to reassess which areas of 
agriculture are supported and promoted. In the future, the basis of 
such decisions must be to meet nutrition and trade needs. This will 
necessarily involve a reorientation of production patterns. 

Naturally, a new food policy that reorients production patterns 
and support systems will initially be regarded as threatening by 
some persons. But the new policy does not have to be a threat. 
Changes can be carefully designed to avoid inequities, to make sure 
that one region of the country or some group of producers are not 
victimized by new policy goals, and to remedy inequities. 

Indeed, any new policy must be constructed so that over the long 
run, it will cause less dislocation and be less inequitable than the 
policies of the past. In previous years. Federal policies and the re- 
sults of federally funded research have caused economic dislocation 
of farmers (especially small farmers), of farmworkers, and of some 
processors and retailers — and usually without any compensation. 



14 



There are, of course, a number of factors that would limit .re- 
orientation of production patterns. Among these are geographical 
factors and farmers' knowledge of new and different crops. 

One example of the type of action I am talking about, in shaping 
production policy to meet nutrition and trade needs, is the creation 
of a domestic wheat and feed grain reserve. The new reserve system 
established by the 1977 Food and Agriculture Act is aimed at pro- 
tecting farmers against low prices in years of surplus, and at provid- 
ing an emergency food supply to meet domestic nutrition needs. The 
creation of the grain reserve provides a floor for farm production 
and is a basic step toward stable prices for one of our most essential 
crops. It also will provide the opportunity for Government to prove 
it can administer a production program equitably. 

Lcmd price problems 

One fundamental issue of production policy that was not ad- 
dressed by the 1977 act is the problem of skyrocketing land costs. 
Record grain prices iii 1972 kicked off a boom in land prices that 
has not relented, despite the dropping grain prices farmers now face. 

Nationally, agricultural land prices have doubled, on the average, 
since 1971. In the Midwest, prices have tripled. In the mid-Atlantic 
area urban development pressures have pushed up land prices. In the 
Midwest, speculation based on high farm prices has pushed ur> costs* 

It is estimated that a new farmer needs $500,000 to buy a farm and 
enter production. FeAv individuals have access to the credit necessary 
to borrow $0.5 million. This encourages purchase of land by banks, 
foreign investors and corporations, and it encourages renting rather 
i han farmer ownership of land. 

Moreover, if land costs continue to inflate as they have, the Xation 
can expect ever-higher consumer food prices — which would in turn, 
if past trends remain true, further inflate land costs. In addition, con- 
tinuously inflating land costs will effectively doom the family farm and 
seriously deplete competition among food producers. Such a result is 
clearly out of line with fostering stable prices. 

The Federal Government should begin an intensive investigation 
of the reasons for rising land costs and begin to develop policy recom- 
mendat ions to slow the trend. At the same time the Department of Ag- 
ricull ure must continue to develop more satisfactory formulas for deal- 
ing with land co>t.- in support programs. 

Finally, a new production policy will have to assure the farmer of 
adequate supplies of the elements of production. The energy crisis of 
in?:;, and its resulting fuel/fertilizer price spiral, proved how vulner- 
able our food system, and individual farmers, are to energy shortages. 
Consideration should be given to the possibility of mandatory alloca- 
tion of petrochemicals for farm tise. A new production policy might 
also include energy and soil conservation incentives and incentives for 
new kinds of energy-saving pest control and fertilization techniques. 

IV. KKASOXABLE FOOD COSTS 

A fourth (dement of a new food policy must be to assure the avail- 
ability of food at reasonable prices. 

In oast years, full production has sometimes been touted as the 
answer to reasonable prices. But full production on the farm will not, 



15 



by itself, guarantee moderate retail price levels. One of the most im- 
portant elements in determining food prices is what happens to food 
after it leaves the farm. 

Marketing costs have risen so sharply during the past few years 
that they now comprise 60 percent of the total food bill. Indeed, the 
Economic Research Service observes that the food price inflation of 
the 1970s has, to a large extent, been attributable to marketing cost 
increases. Between 1974 and 1976, marketing costs increased about 10 
percent annually. According to the ERS, ''increased marketing costs 
will again account for most of the rise in consumer food expenditures 
in 1977." 

It is true that some of the marketing cost increase is atributable to 
higher energy costs and the general inflationary trend. But if we are 
to have both reasonable levels of farm income and reasonable prices 
for consumers, we simply must develop mechanisms to discourage un- 
necessary costs from being built into the food system between the time 
food leaves the farmer and the time it reaches the consumer. 

This means that the Government must cease any encouragement of 
industry practices, and halt the issuance of any Government regula- 
tions, that add to costs unnecessarily. Government transportation regu- 
lations are an obvious area where review and revision could lead to 
reduced costs. The "back haul*' regulations are a case in point. 

Other areas that may also lead to unnecessary and inflated costs 
are inadequate competition, excessive advertising, and excessive 
packaging. 

Inadequate competition is a particularly troublesome area. Recent 
studies have indicated that economic concentration in food manufac- 
turing and retailing is increasing. According to Russell Parker, former 
assistant director of economics at the Federal Trade Commission. 20 
large grocery! chains accounted for 87 percent of total grocery store 
sales in the United States in 1975. This represents an increase of more 
than one-third from the 27 percent controlled by the 20 largest chains 
in 1948. In a study for the Congressional Joint Economic Committee 
(JEC) earlier this year. University of Wisconsin researchers found 
that the 4 largest grocery retailers in 194 metropolitan areas held an 
average of 52 percent of grocery sales. In one-fourth of those areas, 
they held 60 percent or more of sales. 

Parker believes this leads to higher prices for many consumers. He 
asserts that FTC data show that "grocery chains use higher markups 
or oross margins in high market share areas and have lower markups 
whore they have lower market shares." 

The study prepared for the JEC reached similar conclusions. It 
found "strong evidence that 'monology overcharges', that is, prices 
above those in competitive markets, are likely in markets that are 
dominated by one or two firms and/or where sales are highly concen- 
trated among the largest four firms/' 

The studv estimated that total consumer overcharge due to economic 
concentration in 1974 was $602 million. The researchers concluded that 
overcharges vary from city to citv, depending on the extent of con- 
centration. They found that, in 197-k consumers in one city with four 
firm competition suffered a $1.6 million overcharge, while in another 
citv with only two firms controlling most of the market consumers ex- 
perienced an $83 million overcharge. 



16 



Concentration is also increasing among food processors. The number 
of food manufacturers has declined substantially over the past 30 
years. In 1947. there were 44,000 food manufacturers. In 1972, there 
were only 22,172. This may seem like a large number when compared 
to domestic automobile or steel manufacturers but several major food 
lines are highly concentrated. 

Four firms control 84 percent of the breakfast cereal market and 95 
percent of canned baby foods. Two firms have 58 percent of the soft 
drink market. There are no meaningful national figures on concentra- 
tion in the bread baking industry, but on a regional basis, the 4 top 
firms in 18 different cities accounted for about 60 percent of consumer 
bread purchases. 

Inadequate competition may explain why soft drink prices, pre- 
sweetened cereal prices and bread prices rose as sugar and wheat prices 
went up a few years ago, but have not followed the downward spirals 
of those raw materials. 

Many individual areas of food processing do remain competitive and 
fairly reflective of changes in the prices of basic commodities, but this 
is an area where public policy has skirted serious problems. The latest 
data available on food marketing in many cases is from the 196o studies 
of the National Commission on Food Marketing. Ten-year-old studies 
are of a limited value in making food policy, and a first step in this 
area should be creation of another commission or a specific mandate 
from Congress to update the food marketing studies. Once the data 
is available, Government should act to assure adequate competition 
in the food industry. 

Of course, when competition on the basis of price declines, competi- 
tion based on "product differentiation," and making heavy use of 
advertising, often increases. Competition among airlines is a classic 
case in point. Airlines now spend enormous sums to tell us that their 
planes fly in "friendly skies" or feature attractive hostesses who will 
"fly us" to our destination. 

This same pattern is frequently seen in parts of the food industry. 
The decline of price competition is replaced by an upsurge in "product 
differentiation" competition. In the food area. advertising and packag- 
ing are key elements of this growing type of competition. While both 
advertising and packaging have valid market place roles, expenditures 
for both have grown beyond reason in some product lines. Both to- 
gether have become a significant portion of the increasing food mar- 
keting bill and need reexamination by manufacturers and policy- 
makers. 

Advertising now accounts far about 3 percent of the food marketing 
bill. Some of it is price specific but most of it is directed at product 
differentiation. 

Our major concern is the increasingly heavy role of advertising 
in promoting non-nutritive food items. Government is becoming more 
concerned with the health implications of food advertising. The FTC 
ims moved to regulate nutritional claims and may act to strictly 
limit food advertising aimed ;it children. The FDA Commissioner lias 
made clear his view that advertising is an extension of labeling and 
should be regulated accordingly. 



17 



There may be other ways Government should encourage food value 
as measured by price and nutrition. Companies that advertise food on 
television mi^ht be required to give equal time to nutrition messages. 
Government ^could make comparative nutritional price information 
available to consumers in places where people buy food and/or in the 
electronic or print media. 

Government encouragement of advertising through tax deductibility 
has been attacked by some consumer organizations and this area is 
one for examination in public policy formation. Any limits on tax 
deductibility would, however, have to deal with the problem of special 
provision for advertising by new competitors entering concentrated 
markets, and for competitors with a small share of concentrated 
market. 

Packaging is another important area. Packaging costs now account 
for 13 percent of the food marketing bill. Between 1958 and 1974, the 
consumer product cost represented by packaging doubled for items 
like dairy products, produce, beverages, and candy. The Economic 
Research Service says that packaging costs are likely to increase 7 
percent a year through 1980. The increase will come both from grow- 
ing costs of materials and from increased use. We don't know how 
much of these costs are accounted for by unnecessary packaging, nor 
do we know how much packaging is used solely for product identi- 
fication purposes or how much packaging is needed for protection 
in shipping and sales. It is unlikely that Government can make reason- 
able decisions about packaging without that knowledge. 

It should also be noted that packaging now accounts for 30-40 per- 
cent of total municipal solid waste — and expenditures for solid waste 
disposal amount to about $4 billion a year. Reasonable public policy 
should assess whether that is an acceptable cost. 

A few final points on food prices and what to do about them should 
be noted. There are two courses of action that we must resist as pos- 
sible cost -cutting measures. One is to cut food costs by cutting farmer 
income even further. The other is to permit the use of questionable 
substances in foods or to relax health and safety regulations. There 
are few if any acceptable tradeoffs of safety for savings. A cheap food 
supply purchased at the expense of health protection is no bargain. 

V. SAFE AND HIGH QUALITY FOOD 

Given what IVe just been saying, it should come as no surprise that 
the assurance of a safe and high quality food supply is the fifth ele- 
ment of my food policy. Although food safety is virtually unchal- 
lenged as an appropriate goal, the means to achieve food safety have 
been in dispute for over 80 years. The Federal effort to assure food 
safety dates back to 1906, when the original Pure Food and Dru£ Act 
was passed — in large part because of a grave public concern over the 
use of chemicals in prepared foods. The acceptability of chemicals in 
food continues to be a hotly debated issue today. 

There are a number of laws on the books— such as the Food and 
Drug Act, the Meat Inspection Act, and the Poultry Products In- 
spection Act — that are firm in their rejection of unsafe chemicals. A 



18 



food policy that has as its first concern the nutritional well-being of 
the public can ill afford to be less strict than present law. Such a food 
policy must also include vigilant enforcement of these laws. 

This may not be enough, however. Government action to promote 
food safety may need to enter new areas. Present laws deal with food 
additives and manufacturing processes. Yet evidence now suggests 
links hot ween high consumption levels of substances such as salt and 
fat, and such diseases as high blood pressure and a variety of cancers. 
A food policy concerned with food safety should be able to deal with 
these problems as well. Perhaps we should become as concerned about 
the fat in a hot dog as we are about the nitrite. 

In any event, whenever Government takes action on a food safety 
issue to protect the health of its citizens — whether the action involved 
an unsafe chemical or a substance such as fat — there is a potential for 
adverse economic impact on some companies and individuals. For ex- 
ample, pending Government decisions that could lead to bans on the 
use of tetracycline in animal feed or the use of sodium nitrite in meat 
processing may have significant impacts on meat producers and 
processors. 

When Government acts to exclude previously approved products, 
public policy on food safety should include ways to ease the transition. 
This would require, at a minimum, collection of adequate data on what 
the real costs to the industry will be. Present data are almost always 
the industry's "worst case" assessment of the impact. Policy may also 
have to include mechanisms for easing the financial burden of smaller 
firms. 

I know some will argue that consumer sovereignty in the market 
place should permit consumers to purchase anything, no matter what 
its health effects. But in other areas, the Federal Government does not 
fall back on that argument as a way out of its responsibilities. The 
Federal Government regulates dangerous or toxic chemicals. We 
attempt to control water and air pollution. Government funds the 
construction of municipal sanitation systems. Federal programs help 
protect people from disease via vaccination and innoculation cam- 
paigns. Government should play no less responsible role in the food 
system. 

Government policy must also deal with the emerging issue of food 
quality. Public policy should address more adequately such questions 
as the construction and composition of processed foods. Industry is 
engaged in a constant effort to bring new technology to food processing. 
The results are sometimes Lee cream that is not like what mother used 
t6 make, or tissue from ground bone in hot dogs. It is unlikely that 
public policy should exclude the results of new technology from the 
marketplace but it must find better ways to assure consumers that the 
quality of new foods — their nutritional value, taste, and appcarain ' 
are as good or bet lei- than the previous product. We must also find 
heller ways to differentiate between products associated with certain 
basic materials or processing methods and those made in laboratories 
or with new ingredients or methods so that customers will under- 
stand what they are purchasing. 



19 



VI. DOMESTIC FOOD ASSISTANCE 

Finally, food policy must also deal with those people who do not 
have the ability to afford an adequate diet. Present Government policy 
supports food for such individuals through a variety of programs that 
approach the problem in various ways. The food stamp program in- 
creases food consumption by increasing income and limiting the in- 
crease to food purchases. The school breakfast, school lunch, and other 
child nutrition programs provide meals in an institutional setting. 
The women, infants, children food program (TVTC) provides pre- 
scription food packages to vulnerable persons at nutritional risk dur- 
ing the most critical phase of human growth and development. 

The President has proposed to eliminate the food stamp program 
in favor of a general cash assistance program. His proposal assumes 
there will be no appreciable loss of nutrition as a result. Available 
studies seem to support that assumption. They show that low-income 
families tend to allocate their money wisely and to get more nutrients 
per food dollar than the middle income. 

In the institutional feeding programs — such as school lunch — the 
issue of food quality is becoming a growing concern. In the past few 
years, some items of questionable nutritional value — such as fortified 
grain-fruit products and formulated milk products, were allowed 
into some of these programs. We have moved to prevent their further 
use. 

Plate waste and meals that fail to meet portion and nutrition 
requirements are additional problems of the institutional feeding 
programs. 

These programs must be upgraded by placing greater emphasis on 
serving healthy, appetizing diets in attractive settings. These pro- 
grams should be learning laboratories for good nutrition — teaching by 
example that food can be both nutritious and appetizing. 

The women, infant, children feeding program has perhaps the 
greatest capacity to use good nutrition to improve health and assist 
in breaking the cycle of poor childhood development that is often as- 
sociated with poor nutrition. It provides high quality protein, iron, 
calcium and vitamins A and C to pregnant women, nursing mothers 
and young children. Because TVTC operates through health care pro- 
grams, it integrates health care, nutrition education and food assist- 
ance. It has been shown to result in substantially increased visits to 
prenatal and neonatal health clinics — as well as in the increased con- 
sumption of nutritious foods during a critical growth stage. 

COXCLUSIOX 

The food policy I've described — and the questions it raises — may 
make some people uncomfortable. Consumers worry that changes in 
the food economy will hurt them by creating higher prices. Farmers 
are already angry because more of the return from retail food sales 
doesn't flow to them. They fear that Government intervention in pro- 
duction in the name of health or nutrition will put them in an even 
more precarious economic situation. Processors and retailers already 
complain that their profit margins are too low, and that more Govern- 
ment regulation will cause their financial ruin. 



20 



The concern about prices and profits is reasonable. But we cannot 
ignore our basic responsibilities to safeguard the nutrition and health 
of our citizens. The challenege before us, therefore, is to shape a new 
food policy that provides healthful food, and does this at reasonable 
prices with a reasonable return to those who get the food to our 
table-. This is a big job. but it is one of the most important tasks of 
public and private policy in our time. 



U.S. DIETARY GOALS 

( By D. Mark Hegsted, Professor of Nutrition, Harvard School of Public Health 1 ) 



The Dietary Goals for the United States published by the Senate 
Select Committee on Nutrition and Human Needs essentially state 
that Americans eat too much— they eat too much meat, too much fat, 
especially saturated fat, too much cholesterol, too much sugar and 
too much salt. They should eat more fruits, vegetables, grain products, 
especially whole grain products, and unsaturated fat. It is clear that 
a statement of this kind is not very useful, even if you agree with the 
generalities, unless some quantitative estimates are provided. You 
cannot translate the statement into a dietary pattern without at least 
suggesting what is meant by too much and what might be a reasonable 
intake. The report suggests a reduction of fat from the current level 
estimated to be between 40 and 45 percent of calories to about 30 per- 
cent and that one-third of this should be saturated and one-third poly- 
unsaturated fatty acids ; that the diet should not contain more than 
15 percent of calories as sugar. These changes would result in an in- 
crease of total carbohydrate consumption to 55-60 percent of calories 
of which 40-45 percent would be starchy materials. It is recommended 
that protein should provide 12 percent of calories; that cholesterol 
intake should be of the order of 300 mg/day and salt about 3 g/day. 

It is important to emphasize that such a diet does not represent an 
ideal diet. We do not know what an ideal diet is. The Dietary Goals 
are an attempt to arrive at a more reasonable dietary pattern than 
the diet of most Americans. I cannot review much of the evidence 
upon which the Dietary Goals are based, but the major health prob- 
lems of the United States and other affluent countries are coronary 
artery disease, stroke, cancer, diabetes, hypertension and obesity. These 
are the diseases which kill Americans and extract a tremendous toll 
in medical costs, disability, and premature death. Treatment of these 
diseases is ineffective. There must be increasing efforts toward their 
prevention or amelioration. All of these diseases are clearly associated 
with the diet we eat and many other countries with less rich diets do 
not have this disease pattern. In addition to the epidemiologic evi- 
dence there is extensive animal experimentation which supports the 
proposition that diet is an important causal factor in all of these 
diseases. 

The best experimental evidence is available for coronary heart dis- 
ease. This disease alone kills something of the order of 600*000 Ameri- 
cans, many of them before age 65 or whatever a suitable retirement 
age may be. There is sufficient evidence demonstrating a causal rela- 



i The views expressed in this paper are those of the author and not necessarily those 
of the USDA. 

(21) 



22 



tionship between diet and this disease alone to recommend that Ameri- 
cans change their diet. There are abundant data showing that: 

Inappropriate diet->elevated serum lipids-»atherosclerosis 
->heart attack 

It is certain that the dietary factors primarily responsible for this 
sequence of events are the amount and composition of dietary fat and 
the cholesterol content of the diet. It is important to emphasize that 
in American men the serum lipid levels rise during the late teens and 
twenties, many have extensive atherosclerosis in the twenties yet coro- 
nary heart disease begins to become significant in the thirties and 
forties and progressively more men have heart attacks as they become 
older. Tims, it is certain that the early atherosclerotic lesion which 
develops in young men does not induce heart attacks directly. It is 
also certain that the severe atherosclerotic lesions which occur later 
are nearly irreversible. It is important to emphasize this since it means 
that dietary modification in middle-aged atherosclerotic men cannot 
be expected to have much effect on this process. As many of you are 
aware*, a number of current dietary trials are now underway. These 
may be worthwhile but they cannot demonstrate the ultimate effect 
of diet upon coronary heart disease. A truly definitive experiment is 
beyond our capabilities! It would involve the recruitment of a cohort 
of teenage boys, feeding them a diet which would prevent the develop- 
ment of hypercholesterolemia and determining the disease pattern 
ol er the next 20 or 30 years or longer. This is essentially an impossible 
experiment. Many people have optimistic and unwarranted expecta- 
tions about what the current studies may or may not show. 

F would also emphasize that if we considered the data available 
and were truly interested in minimizing the occurrence of heart dis- 
eased it is certain that the dietary recommendation would be much 
more severe than that suggested by the Dietary Goals. Populations 
that have very little atherosclerosis, and almost no heart attacks, con- 
sume ext remely low fat and otherwise restricted diets by our stand- 
aids. Quite frankly, most of us will probably opt for the heart attack, 
cancer, diabetes or hypertension — which are going to get almost all 
<>1' us— rather than consume such a diet for a lifetime. Once we are 
sick — as has been emphasized by a recent television report— we may 
then be willing to submit to such a diet. It is interesting, incidentally, 
that the television 1 report indicated, as I have already, that the severe 
diet did not appreciably modifv the underlying atherosclerotic 
lesiofi -the electrocardiogram of the patients did not change. A con- 
siderable number of smaller dietary trials have already been reported. 
These ha ve generally shown a modest reduction in heart attacks. More 
sevdre dietary restriction may produce more favorable results. We 
must assume, however, thai these improvements are explained, not by 
modification of the atherosclerosis process but by other mechanisms, 
possibly by chances in blood pressure and by a reduct ion in the throm- 
botic process which is the terminal event in many heart attacks. 
Whatever improvement can be obtained, it would seem quite certain 
that the earlier the dietary change is achieved, the greater the effect 
will be. 



23 



It is important also to emphasize that our overall objective is prob- 
ably not to eliminate heart attacks. It is not likely that immortality 
will be achieved bv good dietary practice. Our objective is to have 
people die young as late as possible. It would be a tremendous ac- 
complishment if we could delay heart attacks, cancer, stroke, diabetes 
and hypertension so that they were not prominent causes of death or 
disability before age 65. Of course, many of us are old enough so that 
delay to 65 does not seem much of an accomplishment. 

What we must search for is some dietary pattern that is "reason- 
ably" Recommendations for dietary changes that are too severe will 
be ignored bv most of us. Some people will establish Goals that are 
more than we can reasonably expect to achieve — to be President of 
the company, to make a million, to live to be a hundred, etc. This kind 
of goal does not mean that we consider that we have accomplished 
nothing unless we achieve it. Excessive expectation, however, can be 
discouraging and I believe we are searching for something that we 
can expect Americans to do. 

It is important to emphasize that the nutrition strategy which has 
been developed in the United States and elsewhere over the past 50 
years has been aimed almost totally at the prevention of nutritional 
deficiency. With the discovery of the vitamins about 75 years ago and 
the recognition that pellagra, scurvy, xerophthalmia, beriberi and 
rickets were important causes of death and disability, the primary 
goal of nutrition became and has been since that time to assure an ade- 
quate intake of- all essential nutrients. This was tempered slightly by 
the recognition that obesity was undesirable but the essential message 
that we have promoted has been and is ''Eat more meat, more milk, 
more eggs, more fruits and vegetables, more cereal products — more of 
everything — but don't get fat. This message was developed when we 
had no idea about the ultimate effects of such a diet and essentially no 
knowledge of the relationship between diet and the chronic diseases 
which now beset affluent societies. 

Nutritionists have often pointed out, correctly, that the great ad- 
vances which flowed from Pasteur's discoveries demonstrating that 
disease was caused by infective organisms greatly retarded the accept- 
ance of the fact that disease could also be caused by a deficiency or lack 
of something in the diet. The theory of infectious disease caused prac- 
tically everyone to search for a positive causal agent and the associa- 
tions between poverty, poor hygiene, and deficiency disease made it 
extremely difficult to eliminate infection as a possible cause of pellagra, 
for example. 

To a considerable degree, nutrition is now faced with a similar prob- 
lem. Tye have devoted nearly all of our efforts to assuring an adequate 
diet — defined as one which contains enough protein, vitamins and min- 
erals. The proposition that much of our ill health is due to overnutri- 
tion — not only simply eating too much but eating too much of specific 
materials — is not easy to accept. It will require a substantial revision 
of nutritional thought and the nutritional education messages. I should 
point out that nutritionists cannot claim very much of the credit or 
blame for our current situation. What we eat is largely the result of 
our affluence, the agricultural sj'stem and the sum of the effects of the 
food industry. The message, however, has been the same wherever you 
heard it. 



24 



No one is suggesting, of course, that it is no longer important to 
maintain an adequate intake of essential nutrients.. Clearly, it is. We 
do have some undernourished people in the country but, fortunately, 
the number is small. They must continue to receive appropriate atten- 
tion. The only relatively prevalent deficiency disease that we can iden- 
tify is iron deficiency. This is not limited to poverty groups. Severe 
iron deficiency, however, is not common and generally requires medi- 
cal attention/Nearly all nutritionists will agree that we should mini- 
mize iron deficiency and we could certainly do it. The problem has 
been, and continues to be, that we have not been able to convince the 
medical establishment that it was a sufficient problem to require pre- 
ventive efforts. It is certainly not in the same league as heart disease 
and the other killer diseases.' It is also certain that we do not have to 
overeat to avoid iron deficiency. 

Most of us have seen a recent report which indicates that deaths 
from heart disease have declined in the past 10 years or so. This is 
great. The cause is not clear but it is what we should expect. The 
American Heart Association has for several years been advising a diet 
similar to that of the Dietary Goals. The American public has cer- 
tainly heard of cholesterol — both dietary and serum cholesterol. Con- 
sumption of eggs and butter is down ; consumption of unsaturated mar- 
garine is up. Many more people are jogging and exericising in various 
ways. Treatment of hypertension and diabetes which often cause heart 
disease is better. A considerable portion of the public has gotten the 
message about obesity and has done something about it. The severe 
hyperlipidemias are now clearly recognized as a health hazard and 
dietary treatment is prescribed. Both medical and surgical treatment 
have improved. We should expect an improvement in the situation. 
But we must also be aware that this improvement leaves a long way to 
go. There are at least 200,000 permature deaths from heart disease 
and as we improve the situation our definition of permature will be 
later and Inter. We must continue to do what we have been doing but 
with more vigor at every level. 

It has been argued that a dietary pattern such as that suggested by 
the Dietary Goals is not appropriate for children, pregnant women 
and others of the population. There is no nutritional basis for this. The 
piot eiu intakes of Americans are so high that they greatly exceed all 
reasonable estimates of requirement. The diet suggested would not 
necessarily reduce the intakes of vitamins and minerals. Indeed, it 
may very well increase the intake of most. It should also be em- 
phasized that in a technological society of the kind we have the provi- 
sion of vitamins and minerals is technologically easy. Fortification of 
foods can be expanded or restricted as we see fit. You simply cannot 
justify a diet which produces chronic disease in order to obtain suffi- 
cient vit amins and minerals. 

Nobody expects the American diet to change overnight. Nutrition 
education, fortunately or unfortunately, whichever way you view it, 
docs uot appear to be very effective. But, it is clear that the public is 
demanding better and more explicit information all of the time. As I 
have already indicated, whatever you may think, the Dietary Goals 
proposed by the NicGovern Committee are relatively moderate recom- 
mendations. What the Dietary Goals mean in terms of food is some- 



25 



thing like this : Less meat and leaner meat and some substitution with 
poultry and fish. The protein consumption of the American public is 
now excessively high. It has no nutritional justification and my guess, 
for what it is worth, is that evidence will continue to accumulate to 
show that the high protein consumption is undesirable in itself and not 
only because meat is a primary source of saturated fat. It means less 
eo-gs and butterfat. The dairy industry should begin to look at the 
restrictions it has imposed upon itself that inhibit the production and 
marketing of low-fat products and modified dairy products. It means 
less sugar of all kinds. Products are going to have to be labeled with 
sugar content and saturated fat content. Sugar, whether deserved or 
not, has caught the public's eye and there is essentially no nutritional 
defense of products high in sugar. Products will almost certainly Jiave 
to be labeled with cholesterol and salt content and, again, there is no 
positive argument for high consumption levels. It means increased 
consumption of polyunsaturated vegetable oils in all forms. It means 
increased consumption of all kinds of fruits and vegetables. This 
should mean an expansion of the areas producing these nearer to the 
consumers. It means increased consumption of breads, cereals, and 
potatoes. These have been the whipping boys since obesity became a 
popular subject but unjustifiably so. The calories in bread,' pasta, and 
potatoes are not more likely to produce obesity than other sources of 
calories. Indeed, a leaner diet with less fat and sugar is likely to be 
helpful in controlling excessive intake of energy. 

Some people have argued, of course, that we do not know enough to 
recommend a change in the American diet. I believe that we know so 
much that we cannot alford to ignore what we do know. We are dealing 
with the most important medical problems of our time. Many coun- 
tries now have a better health record than we do. Sweden which has 
one of the best has already adopted national nutrition goals similar to 
the ones we are discussing. The issue is not have we proven that a 
change in diet will be beneficial or can we predict the results of a mod- 
eration in the diet. As I have indicated we do not have the technical 
capability to answer some of the questions we can easily ask. We can, 
however, ask what are the proven benefits of the American diet. There 
are no positive arguments for a diet which is high in fat. sugar, and 
cholesterol and there are a host of arguments against it. The real issue 
is how soon, by what mechanisms, and how rapidly we move to en- 
courage consumption of a more moderate diet. 



ESTABLISHING AND IMPLEMENTING DIETARY GOALS 

(By Gilbert A. Leveille, Chairman, Department of Food Science and Human 
Nutrition, Michigan State University) 



The need for dietary goals is obvious. It is clear that the consum- 
ing public has a definite need for guidance in making appropriate 
food selections that will ensure, insofar as possible, the consumption 
of a diet providing the essential nutrients and ensuring maximal 
health. The selection of such a diet is not a simple matter and must be 
based on current scientific information. The public cannot be expected 
to be conversant with the scientific information and therefore this 
information must be translated into food terms which the consuming 
public can understand and use. The need for such goals should be 
inherent in any national food and nutrition policy. Such a policy, 
developed by the National Nutrition Consortium, has been incor- 
porated in previous reports from the Senate Select Committee on 
Nutrition and Human Needs. Dietary goals are an important compo- 
nent of any national policy for once established and accepted by the 
public, they have significant impacts upon food production and proc- 
essing systems. Any effective national policy must also involve an 
effective education component which will assist consumers in under- 
standing and adopting the enunciated goals. 

Recently the Senate Select Committee on Nutrition and Human 
Needs has published a set of dietary goals. This effort is laudable, 
but unfortunately the goals leave a great deal to be desired. In many 
respects these goals are not based on the contemporary science and if 
implemented would not be in the public interest. I will attempt to 
point out that these goals are not based on the whole of the scientific 
evidence available, that they fail to recognize significant problems 
which exist in our society, and unfortunately, fail to recognize the 
possible negative impacts which their implementation might have. 

Ideally dietary goals should take into account those positive aspects 
of our current national diets and should assist in sustaining them. 
Further, they should correct the poor eating habits which can be 
identified. The American diet has been referred to as "pathogenetic'' 
by some and as "disastrous"' by others, implying that our diet has 
"deteriorated" in the past 50 to 75 years. I submit that such a conclu- 
sion is erroneous and misleading. The American diet today is better 
than ever before and is one of the best, if not the best, in the world 
today. There is much supporting evidence for this statement. One need 
merely consider the stature of the current generation of Americans 
which is coining closer and closer to the achievement of maximum 
genetic potential. We have virtually eliminated morbidity and mortal- 
ity from acute nutritional deficiencies. A prime example is pellagra 

(26) 



27 



resulting from niacin deficiency, which claimed thousands of lives only 
a few short decades ago but which is virtually unheard of today. The 
same could be said for rickets which was overcome by the fortification 
of milk with vitamin D and of goiter which was eradicated by the 
iodization of salt. We have seen a remarkable increase in the life 
expectancy of the American population. We have seen many improve- 
ments in the quality of our food supply as measured by its safety, 
wholesomeness and variety, it is unparalleled in the world today. Tak- 
ing all of these factors into account, it seems abundantly clear to me 
that we can put to rest serious concerns about the quality of our diet 
and any consideration of returning to the diet of days gone by. Any 
notion that a return to the diet of the past would improve the well- 
being of Americans is nostalgic nonsense. Rather, we should identify 
existing nutritional problems and attempt to develop solutions to 
them. This, it seems to me, is the appropriate challenge of today and 
the challenge of developing appropriate goals for the American 
population. 

The goals developed by the Senate Select Committee imply that 
we have been a Nation without dietary goals. This is not completely 
true. Admittedly we have not had a national food and nutrition policy 
to give visibility to dietary goals but assuredly we have had guide- 
lines which have served effectively to direct many food and nutrition 
programs in this country. The guidelines of which I speak are the 
Recommended Dietary Allowances (RDA) initially established by the 
Food and Nutrition Board of the National Research Council in 1941 
and periodically revised since then. The RDA's were initially devel- 
oped as a basis for planning food supplies for the military. They have 
proven to be equally valuable in planning food supplies for the civilian 
sector of our population and have served admirably as a basis for a 
variety of feeding programs within the U.S. Department of Agricul- 
ture. The RDA's have also been the basis for the establishment of 
guidelines for nutrition labeling by the Food and Drug Administra- 
tion. Admittedly the RDA's are considerably different in evolution 
and purpose from the Senate Select Committee's dietary goals for 
the United States. 

The RDA's differ from the Senate Select Committee's goals in 
that the former are based on the requirements for known nutrients. 
The RDA's represent an attempt to establish an allowance that will 
meet the needs of virtually the entire population. The goals developed 
by the Senate Select Committee on the other hand really reflect an 
attempt to provide guidelines for the preA T ention and/or cure of dis- 
eases considered to be public health hazards. Any dietary guideline 
must have, as a fundamental basis, the objective of meeting essential 
nutrient needs and, secondarily, must deal with other recommenda- 
tions that would contribute to ensuring the public health. If such 
guidelines are to deal with the prevention of specific diseases, there 
should be a sound scientific basis for their establishment and they 
should not put any segment of the population at nutritional risk. 
Unfortunately, the Senate Select Committee's dietary goals have not 
provided this assurance and they are not based on the whole of avail- 
able scientific evidence. 

The dietary goals, published by the Senate Select Committee, as- 
sume 1) that the diseases of primary concern, namely cardiovascular 

98-723—77 3 



2S 



disease and cancer, are of epidemic proportions in the United States, 
and 2) that appropriate dietary modifications can delay or prevent 
these disease. I would like to spend a brief time reviewing these two 
fundamental assumptions. There is little question that the proportion 
of the U.S. population dying from cardiovascular disease and cancer 
has increased dramatically over the past 50 years. I submit that this 
is not surprising and is to be expected. Accompanying the increase in 
mortality from cardiovascular disease and cancer has been a significant 
reduction in mortality from infectious diseases. Advances in medical 
science have greatly reduced mortality from such causes as tubercu- 
losis, pneumonia, etc. The old adage that "death and taxes are as- 
sured" remains to be disproven. Consequently, one would expect that 
the elimination of death from infectious diseases would simply involve 
some other cause of death becoming primary. Accompanying the im- 
provements in medical care, sanitation and nutrition has been an in- 
crease in life expectancy and an increase in that segment of our popu- 
lation above the age of 65. This proportion of our population has 
increased significantly over the last several decades and continues to 
grow. The diseases of primary concern to the Senate Select Committee, 
namely cardiovascular disease and cancer, are chronic diseases. The 
probability of incurring these diseases grows with advancing age. 
Thus, with an older population an increase in both of these diseases 
is predictable. This is obvious when one examines mortality statistics 
on an age adjusted basis. While the total number of deaths from cardio- 
vascular disease and cancer have increased over the last several dec- 
ades, the mortality rate expressed on an age adjusted basis has not 
increased significantly and, in fact, for cardiovascular disease has 
shown a significant reduction. Thus, the urgency for changes in diet 
and life style to control the rate of increase of these chronic diseases 
is not supported by available evidence. This certainly does not imply 
that we should not direct our attention to further reducing morbidity 
and mortality of chronic diseases, for clearly that should be the direc- 
tion of our research and educational efforts. 

I would now like to turn to the scientific basis for the establishment 
of the Senate Select Committee's dietary goals. It is implied that the 
high incidence of cardiovascular disease in this country stems directly 
from an increased consumption of fat, particularly saturated fat, and 
cholesterol. It is clear that elevated blood cholesterol levels represent 
a risk factor in the development of cardiovascular disease and that 
diet can influence circulating cholesterol levels in some individuals. 
It should also be recognized that diet is not the only factor affecting 
circular ing cholesterol levels nor is the blood cholesterol level the only, 
nor the major, risk factor in cardiovascular disease. The concept that 
dietary modification will pro vent or delay atherosclerosic heart disease 
remains a hypothetical and not a demonstrated fact. While it may 
" in "prudent" to modify one's diet on the basis of existing hypotheses, 
it hardly BefipUfl a sufficient basis for the recommendation of major 
dietary changes for the entire population. There are many other risk 
factors associated with the development of cardiovascular disease. The 
relative importance of each varies from individual to individual and 
requires a comprehensive evaluation of the relative risk factors for 



29 



each individual. Considerable controversy exists among specialists as 
to the relative value of dietary modification. There is no consensus 
upon which to establish definitive dietary guidelines for the general 
population. The Senate Select Committee's report also implies that 
the intake of sugar contributes to the increased risk of cardiovascular 
disease in the American population. This conclusion is contrary to 
the views of most experts in the field. Such a hypothesis has been put 
forth but experimental evidence supporting the hypothesis is com- 
pletely lacking. Furthermore, the recommendation for an increased 
intake of polyunsaturated fatty acids may represent a risk which has 
yet to be fully evaluated. On the basis of the totality of available 
evidence, it seems highly premature to make any major recommenda- 
tions for dietary change for the prevention of cardiovascular disease. 
Rather, it would seem far wiser to recommend the establishment of a 
system for the evaluation of individuals to establish that segment of 
the population at risk and to make appropriate dietary and other 
recommendations for these individuals. 

The report of the Senate Select Committee proposes that a relation- 
ship exists between diet and the incidence of cancer. Evidence for such 
a relationship is extremely meager. The available evidence is strictly 
epidemiological in nature and remains to be verified experimentally. 
Such evidence is at best suggestive and cannot be accepted as a reason- 
able basis for recommending dietary changes. The recommendation 
of the Select Committee that a shift from foods of animal origin to 
those of plant origin would protect the population from cancer is 
unfounded and is not supported by available evidence. Consequently, 
these recommendations, like those dealing with cardiovascular disease, 
are premature and unsound. 

The Senate Select Committee has recommended a significant reduc- 
tion in the intake of salt as a means of reducing the incidence of 
hypertension. Again, this recommendation is based on a modicum of 
tenuous information. The available evidence does demonstrate that 
excessive salt intake can induce hypertension in a segment of the 
population. There is debate as to the proportion of the population 
whose blood pressure would be influenced by salt intake but it is gener- 
ally agreed that this represents a relatively small proportion of the 
population. The desirability of reducing the salt intake of the total 
population must be carefully examined. It may be wiser to establish 
means of detecting those individuals at risk and to advise this group 
of desirable dietary changes. It should also be recognized that not all 
hypertensives will respond to a reduction in salt intake. Further, 
virtually all professionals examining the dietary goals of the Select 
Committee are in agreement that the recommended level of salt intake 
of three grams per day is excessively low and represents a level which 
is not achievable. 

There are health problems which exist in this country and which 
should receive attention. Dental caries, obesity and iron deficiency 
anemia have been identified by several surveys as problems warranting 
attention. There is also preliminary evidence suggesting that certain 
population segments have marginal intakes of certain trace elements, 
particularly zinc and perhaps chromium. These problems deserve 
attention. 



30 



The problem of dental caries has been researched to a significant 
degree, but the need for further research is evident. It is known that 
sucrose will contribute to dental caries, however the contribution is not 
so much a quantitative one as a matter of the form in which sugar is 
consumed. Sugar in the form of sticky candies remains in the oral 
cavity, in contact with the dental enamel, for significant periods of 
time and provides an ideal environment for the proliferation of acid 
producing microorganisms responsible for the initiation of caries. 

The problem of obesity is recognized, however the solution to this 
problem is not as evident. Certainly reduction of body weight to a 
desirable level involves a reduction in caloric intake. However, the 
achievement of that reduced intake remains difficult and is an area 
requiring further research. National dietary goals should certainly 
recognize the existence of obesity as a problem and provide incentive to 
reduce caloric intake. In this regard a reduction in dietary fat could be 
supported, since this is the most calorically dense component of our 
diets. 

The intake of foods with low nutrient content is partially addressed 
in the Senate Select Committee's report. Unfortunately the report deals 
only* with the intake of sugar and fails to recognize the fact that other 
foods, such as alcohol and oils and shortenings can also provide signif- 
icant calories without providing other nutrients. The Select Commit- 
tee's report erroneously implies that our intake of sugars and sweeten- 
ers has increased dramatically in recent decades. In fact, our intake of 
sugar on an absolute basis has not increased significantly since 1925. 
What has changed is the form in which sugar is purchased and utilized. 
A half century ago most of the sugar was purchased as such and 
utilized in the home. Today a smaller proportion of sugar is purchased 
for home use and the greater proportion is consumed in preprepared 
products, such as baked goods. However, it should be recognized that 
the proportion of calories derived from sugar has increased, for while 
the absolute amount of sugar consumed has remained unchanged, our 
per capita intake of energy has declined. Thus, our consumption of 
sugar as a percent of calories has increased. There is no evidence that 
this increased proportion of calories from sugar has any detrimental 
effect but it should be recognized that sugar is one of those foods having 
a low nutrient content and from this standpoint a reduction in its 
consumption might be warranted. 

One of the significant concerns regarding the American diet is the 
fact that due to our sedentary life styles, the consumption of calories is 
declining steadily. If we are to deal successfully with the problem of 
obesity, a st ill greater reduction will be required. The requirement for 
other nutrient- remains essentially unchanged even though caloric 
intake decreases. Consequently, in order to meet nutrient needs, it 
becomes important to increase the nutrient density of those foods which 
are consumed. This requires an even more careful selection of foods to 
comprise a complete diet, a task which is virtually impossible for some 
nutrients at very low caloric intakes. For example, it is not unusual for 
women in the C.S. to be consuming as few as 1,500 to 1,700 calories per 
day. ( )n this caloric intake it is virtually impossible to meet the 18 mg 
KDA for iron in the premenopausal woman. In such individuals the 
iron requirement can only be met by increased fortification of certain 



31 



foods or by the use of iron supplements. This appears to be true for 
other nutrients such as zinc and copper. Consequently, any recommen- 
dation for a change in diet must carefully assess the impact that such 
changes would have on the intake of essential nutrients. To my knowl- 
edge this has not been assessed for the changes which the Select 
Committee has recommended. 

It seems that the recommendations for dietary change made by the 
Select Committee have not been evaluated from the standpoint of other 
potential, undesirable impacts which they might have if implemented. 
For example, it is recognized that a significant proportion of the total 
iron consumption by the U.S. population is derived from meats and 
meat products. Further, it is recognized that a large proportion of the 
iron derived from meat is in the form of heme which has a much higher 
availability than does nonheme iron. If the recommendations of the 
Select Committee were followed, the likely effect would be a significant 
reduction in total iron intake and a decreased availability of that iron 
which was consumed. If this were to occur, the effect on the problem of 
anemia, which already appears to be widespread, would be disastrous. 
Thus, the recommended changes cannot be made without recognizing 
the need for increased iron fortification or somehow increasing the 
availability of iron from sources other than meat. Similarly the 
American population derives a significant proportion of its dietary 
zinc from meat. A reduction in meat intake would result in a significant 
reduction in zinc consumption. Further, the increased intake of cereal 
grains would increase the dietary content of phytic acid which is known 
to bind zinc and reduce its availability. Thus, there is a high probability 
that implementation of the Select Committee's goals would result in 
serious zinc deficiency in some segments of the population. 

Careful evaluation of the Select Committee's recommendations, 
demonstrates that they are not based on the available scientific informa- 
tion. Further, there are many inconsistencies and outright errors in the 
development of the goals. The errors of omission and interpretation are 
sufficiently great as to cause serious concern if they were taken seriously 
and applied to any current feeding programs. 

There is a need for sound dietary goals to guide feeding programs 
and to guide individual consumers in their food choices. There is no 
question, in my opinion, but that the Senate Select Committee's goals 
are inappropriate and that a totally new effort is required. Such an 
effort should involve a broad cross-section of expertise from the nutri- 
tion, food and medical communities. It should involve consumers and 
consumer advocates who are knowledgeable about the application of 
nutrition and food information by consumers. Only in this way can a 
realistic set of dietary goals be established which will serve the best 
interests of the U.S. population. I firmly believe that the Department 
of Agriculture should be at the forefront of such a development. This 
would seem particularly appropriate since the application of sound 
guidelines to the feeding programs administered by the Department 
would impact upon countless thousands of individuals. 



THE DIETARY GOALS AND FOOD ON THE TABLE 

(By Betty B. Peterkin,* Home Economist, Agricultural Research Service, USDA) 



This fall. Secretary Bergland lias repeatedly emphasized the im- 
portance of nutrition in setting the direction for food and agriculture 
policy. As part of the Department's responsibility in this area, the 
Agricultural Research Service — the agency of the Federal Govern- 
ment with primary responsibility for the development of food selec- 
tion and dietary guidance for the general public — has begun to re- 
examine its national dietary guidelines. 

As one step in that process we have analyzed the goals set forth in 
the report of the Senate Select Committee on Nutrition and Human 
Needs — "Dietary Goals for the United States." 1 We hope this analy- 
sis, made primarily for the use of USDA, will be useful to others, 
such as the Select Committee on Nutrition and Human Needs (Com- 
mittee), nutrition scientists and educators, the food industry, and 
consumers, in appraising the goals from various perspectives. 

The analysis consists of interpretation of the Dietary Goals in terms 
of the kinds and amounts of foods that will meet them. It explores diets 
for individuals as well as the population as a whole. Such interpreta- 
tion makes possible appraisal of the goals for their sociological and 
economic, as well as their physiological, implications. Through such 
interpretation, the meaning of the goals for the consumer, the food 
producer, the food processor, and food regulatory agencies begins to 
become apparent. 

Today, I will review briefly the changes in dietary levels and in food 
selection suggested by the committee in its report of the Dietary Goals 
released February 1977. Then, I will discuss some of the many diets 
for men, women, and children that meet the Dietary Goals and cer- 
tain changes in food selection and/or food production and processing 
that might contribute toward achieving the goals. 

Dietary goals and food selection — changes suggested in committee 
report 

A bar chart in the committee report shows the difference in sources 
of food energy, such as fat, protein, complex carbohydrate and sugar, 
for the '"current diet" and for the Dietary Goals. The current diet is 
based on the nutritive value of the U.S. per capita food supply — the 
food that disappears into civilian food consumption, some of which 
may not be eaten. 



•The assistance of Richard L. K>rr and Carole J. Shore in the preparation of material 
Vr«'sontoM Is gratefully acknowledged. 

! Select Committee on Nutrition and Human Needs, U.S. Senate, February 1977. Dietary 
Goals for the United States. 95th Congress, 1st Session. Committee Print. 



(32) 



33 



The goals call for — 

A decrease from 42 percent to 30 percent of energy from total 
fat; 

A decrease from 16 percent to 10 percent of energy from satu- 
rated fatty acids; 

No change in the level for protein — to provide 12 percent of 
energy; 

An increase in total carbohydrate consumption to account for 
55 to 60 percent of energy intake ; 

A decrease in the consumption of sugar — a major source of car- 
bohydrate. The percents on the chart — 24 percent of energy in the 
current diet and 15 percent of energy as the goal — refer to total 
sugars, including sugars found naturally in foods such as milk 
and fresh fruits ; and 

A two-fold increase in the energy from complex carbohydrates, 
provided in diets mainly by grain products and some vegetables. 
Dietary Goals are also specified for cholesterol — about 300 milli- 
grams per day- — and for salt, about 3 grams per day. No goal or energy 
allowance is specified in the report for alcohol, which provides sub- 
stantial amounts of energy in many U.S. diets. 

The committee report gives this advice on how to change food selec- 
tion to meet the goals : 

Eat more fruits and vegetables and whole grains ; 
Eat less meat and more poultry and fish ; 

Cut down on foods high in fat and partly substitute polyun- 
saturated for saturated fat ; 

Substitute nonfat milk for whole milk ; 

Cut down on eggs, butterf at, and other high cholesterol sources ; 

Cut down on sugar and foods high in sugar ; and 

Cut down on salt and foods high in salt. 
These suggestions point the way toward the proposed goals for the 
"average" consumer in the population. They also present a challenge 
to food and agricultural researchers, food regulatory agencies, and to 
food producers and processors to develop and supply the population 
with foods that are low in fat, especially saturated fat, and that con- 
tain less sugar and salt. 

Food consumption and dietary goals 

The bar chart in the committee report shows that U.S. diets as de- 
fined by the food that disappears into civilian consumption do not meet 
the goals. U.S. diets can be appraised with respect to the goals using 
two other types of dietary data : (1) food used by households in terms 
of food brought into the kitchen — as purchased or obtained from home 
gardens or as gift or pay, and (2) food intake or food actually eaten by 
individuals. These two types of data were collected nationwide in 
USDA's 1965-66 Household Food Consumption Survey and are again 
being collected in our 1977-78 survey. Food intakes of individuals are 
also obtained in DHEW's Health and Nutrition Examination Survey. 

Diets of men, women, and children, in terms of food as purchased, 
from the 1965-66 survey do not meet the Dietary Goals (table 1). Fat, 
protein, cholesterol, and sugar levels are higher and carbohydrate levels 
are lower on the average than the goals. Levels of polyunsaturated 



34 



fatty acids, as indicated by linoleic acid, are lower than the goal; and 
levels of monounsaturated fatty acids, as indicated by oleic acid, and 
of saturated fatty acids are higher than the goals. Generally, men's 
diets deviate most from the goals. Fat and cholesterol levels in their 
diets are somewhat higher than in diets of women and children. On the 
other hand, sugar levels are lowest in men's diets — providing only 14 
percent of food energy (calories) compared to 16 percent for women 
and as much as 18 percent for children. Average diets for all of the 14 
sex-age categories studied 2 provide the RDA for protein, vitamin A 
value, thiamin, riboflavin, niacin, and ascorbic acid ; but diets for Sev- 
ern 1 categories fail to meet the RDA for calcium and iron. 

Daily food intakes of 6,000 people from the 1965-66 survey were re- 
viewed with respect to two of the goals — those for total fat and total 
carbohydrate. Fewer than 3 percent of the persons reported intakes 
that met the two goals. Essentially none of the 3 percent reported in- 
takes that also met the 1974 Recommended Dietary Allowances 
(RDA) 3 for all of the five vitamins and two minerals studied. 

Modifying diets to meet the dietary goals 

We modified diets to meet the Dietary Goals using the committee's 
suggestions for change in food selection, listed previously, and average 
food consumption patterns (diets) for 14 sex-age categories from our 
196.5-66 food consumption survey as the basis for certain assumptions 
about food selection. Alternate assumptions incorporate some possible 
modifications to foods through change in production and processing. 
Obviously, other assumptions could be used for deriving diets beyond 
the dozen or more we have developed to date. 

The food consumption patterns used consist of average quantities of 
17 food groups in terms of food as you buy it. 4 Examples of the food 
groups are milk, cheese, and ice cream; meat, poultry, and fish; eggs: 
dry legumess and nuts; four groups of vegetables and fruit ; four groups 
of grain products; fats and oils; and sugar and sweets. 

Table 2 shows some of the food groups and the nutrient sources of 
energy they provide compared to the recommended distribution of en- 
ergy sources of the Dietary Goals. The groups with large percentages 
of calories from complex carbohydrate are more desirable than those 
with large percentages from fat for changing diets to meet the goals. 
To increase carbohydrate levels in diets, as the goals propose, quanti- 
ties of vegetables and fruits and cereal and bread in the diet will need 
to be increased. To reduce fat levels in diets, quantities of fats and oils, 
milk, meat, and eggs will need to be reduced. Other alternatives are to 
change the composit ion of certain food groups to provide higher pro- 
port ions of complex carbohydrate and lower proportions of fat through 
product modification and/or food selection. 

We assumed in modifying diets to meet the goals that the makeup of 
foods w tthin most of the 17 food groups in the food consumption pat- 
terns i I he same as the average for households surveved. For example, 
the pTopoit ion of the citrus fruit and tomatoes group that was reported 



r Sep fable S for Sf>x-;if.'i> rntcporles. 

! , ' ; 11 ' A "";""'- Sciences, 1<»74. Recommended dietary allowances. Eighth edition, 
f , ''I'/"'' iVV 1 ,, , r hroUi:h \ ln, <> Mt&ei) from pardon or farm in forms of 17 

rood t ,m the 14 I.-.,,! sroupi shown m (Able 3 abd coffee, tea. and cocoa : punches, ades. 

and soft drinks , and seasonings and lcavoninjr apents. 



35 



as fresh oranges by survey households in 1965-66 is assumed in the 
diets. However, for three groups — meat, poultry, and fish ; milk, cheese, 
and ice cream ; and fats and oils — we set up three alternative sets of 
assumptions (options) concerning the makeup of the group to demon- 
strate their differing impacts on diets. Option 1, which attempts to 
follow suggestions for change in food selection in the committee report, 
is used primarily in this study for interpreting the goals (tables 3-10). 
Options 2 and 3, which more closely resemble reported food consump- 
tion within the three food groups than Option 1, are described and in- 
formation about diets incorporating them is given in tables 11 and 12. 
Alterations to usual consumption in Option 1 are as follows : 

For the meat group, drippings and all separable fat from meat are 
discarded; the quantities of meat, poultry, and fish are adjusted from 
about three-fourths meat and one-fourth poultry and fish to one-half 
meat and one-half poultry and fish. These changes reduce the percent 
of calories from fat in the meat, poultry, and fish group from 62 to 54 
percent. 

For the milk group, skim milk replaces all milk, cheese, and ice 
cream. This change reduces the percent of calories from fat in the milk 
group from 49 to 5 percent. 

For the fat group, butter and margarine are replaced by soft marga- 
rine, and lard and vegetable shortening are replaced by vegetable oils. 
These substitutions increase the proportion of polyunsaturated fatty 
acids and decrease the proportion of saturated fatty acids. 

A fourth set of assumptions (Option 4) illustrates some changes in 
food selection with major implications for food production and proc- 
essing of foods, as well as for Government regulations, that would con- 
tribute toward lower levels of fat and higher levels of complex carbo- 
hydrate in diets. Assortments of foods in food groups assumed in this 
option tend to be optimum with respect to lowering levels of fat and 
increasing levels of complex carbohydrate. In Option 4, as in Option 1, 
milk is in nonfat form and fats and oils are those types with high pro- 
portions of polyunsaturated fatty acids. The meat group includes 
items of low fat content — lean from Good Grade beef and flesh of 
chicken or meat and poultry products of comparable low fat composi- 
tion. This group as modified has an average of 6 percent dietary fat 
by weight, considerably lower than the 30 percent currently allowed 
in certain processed meats, such as frankfurters. With respect to grain 
products. Option 4 includes only the kinds of grain with the highest 
carbohydrate content, such as rice, and eliminates grain products that 
contain fat and sugar. Option 4 changes would reduce the percent of 
calories from fat in the meat, poultry, and fish group from 62 to 32 
percent. They would increase the percent of calories from carbo- 
hydrate in the grain products group to 89 percent. 

' The model for developing the USDA family food plans 5 was 
adapted and used to adjust the food consumption patterns of each of 
the 14 sex-age categories to meet the Dietary Goals. The food plan 
model selects the optimum diet — the quantities of the 17 food groups 
that represent as little change from the quantities of the food groups in 
the food consumption pattern as is necessary to meet nutritional 

£ For additional information on procedures used in developing food consumption patterns 
and on the model used to modify patterns, refer to "The Thrifty Food Plan," CFE (Adm.) 
326, Consumer and Food Economics Institute, Agricultural Research Service, USDA, 
Hyattsville, Md. 20782. 



36 



specifications. "Change" is measured in terms of squared weighted 
deviations from the quantities of food groups in the consumption 
pattern, and total change is minimized. The weights are set to cause 
deviations to be minimized on the basis of percentage change rather 
than change in pounds of food groups. The squaring of weighted 
deviations Results in small changes in amounts of several food groups, 
rather than a large change in one group to meet a specification. 

Two sets of nutritional specifications (Goals) based on Dietary 
Goals were used in diets to be discussed here. The two sets differ only 
in that one includes specifications for levels of five vitamins — vitamin 
A value, thiamin, riboflavin, niacin, and ascorbic acid — and two min- 
erals — calcium and iron ; and the other does not. 

Specific goals used in modifying diets in this study are as follows : 

1. Total energy intake for each sex-age category equal to the RDA 
plus 5 percent. The 5 percent is added to allow for some discard of food 
and still provide for energy needs. 

2. Total fat to provide 30 percent or less of energy. 

3. Saturated fat to provide 10 percent or less of energy. 

4. Cholesterol in daily amounts of no more than 300 milligrams plus 
5 percent. 

5. - Sugar other than that found naturally in foods such as milk and 
fresh fruit to provide 10 percent or less of energy. The 10 percent goal 
for such sugar, rather than the 15 percent goal for total sugars in the 
committee report, was used with concurrence of the committee. 

6. Protein to provide 14 percent or less of energy. The 14 percent 
level, rather than the 12 percent shown in the committee report, also is 
used with the concurrence of the committee, 6 The committee's intent 
in establishing the goal for protein was to maintain the level of protein 
in the current diet; therefore, 12 percent of energy from protein — the 
level in the U.S. food supply in recent years — was selected. In the food 
patterns from the 1965-66 survey of household food consumption used 
in this study, 14 percent of energy is provided by protein ; therefore, a 
goal of 14 percent is used. 

7. Carbohydrate to provide 56 percent or more of energy. 

8. Five vitamins and two minerals in amounts of at least the RDA 
plus 5 percent. (This specification is included in only one of the two 
sets of goals.) 

'.). Salt is not included as a specification because of the limited in- 
formation on the sodium content of foods and on salt added to food. 

Diets that meet the Goals, Option 1 

Changes in diets for all sex-age categories are required to meet the 
Goals but not necessarily the RDA (tables 3 and 4) and to meet the 
Goals and the RDA (tables 5 and 6). Diets modified to meet only the 
( roals also meet the RDA for the man 20-54 years of age and many of 
the other sex-age categories. 

To meet i lie ( foals, the man 20-54 years old, in addition to changing 
seled ibns from the milk, meat, and fat groups according to Option 1, 
would need to buy and use on the average — 
Two-thirds more grain products; 
One-fourth more vegetables and fruit; 
One-eighth m0 re dry legumes and nuts; 

Li*S^9^St 'nn 4 f fn ? the chtt ?* e ln f0 °? consumption patterns required to meet the goals 
with \z percent of energy from protein. 



37 



One-eighth more milk — all of it in the form of skim milk ; 
One-half as many eggs ; 

One-half as much refined sugar and sweets, such as sirup, and 
jellies; 

One-sixth less fats and oils ; and 

One-fifth less meat, poultry, and fish. Taking into account the 
adjustment to increase the ratio of poultry and fish to meat, as 
suggested by the committee and incorporated into Option 1, this 
decrease of one-fifth for the group translates into a 45 percent de- 
crease for meat and a 45 percent increase for poultry and fish. 
However, the suggestion by the committee that meat consumption 
be reduced and poultry and fish consumption be increased — a 
change in the ratio of meat to poultry and fish — is not necessary 
if the meat eaten is trimmed of all fat, fat drippings from meat are 
not used, and other measures to control fat in the diet are fol- 
lowed. Reduction in the overall consumption of meat, poultry, and 
fish is essentially the same when under Option 1 the ratio of meat 
to poultry and fish is changed (table 6) and, under Option 2, it is 
not changed (table 11). 
Meeting the Goals for total carbohydrate, sugar, protein, and total 
fat appears to require the most change in quantities of food groups 
used for all sex-age categories. The Goals for saturated fatty acids 
and for cholesterol, except in the man's diet, are not as difficult to 
achieve. This is partly because the quantities of meats and eggs are 
restricted due to their relatively low-carbohydrate and high-fat com- 
position and because only fats and oils that have high proportions of 
polyunsaturates and skim milk are used. 

The cholesterol goal of 300 milligrams per person per day is more 
limiting for men than for women and children. It translates into 110 
milligrams per 1,000 calories of energy allowance for the man, com- 
pared with 150 milligrams for the woman and 167 milligrams for 
the 6-year-old child. 

The food sources of the calories from carbohydrate, protein, fat, and 
sugar in the man's diet and in his diet modified to meet the Goals with 
Option 1 assumptions are summarized in table 7 and discussed below : 
Carbohydrate. — To meet the Goals, the quantity of cereal, pasta, 
flour, and mixes in the consumption pattern is about doubled ; the 
quantity of bread is increased by two-thirds ; and the quantity of other 
bakery products is increased by over one-third. Such increases in the 
use of grain products are required to meet the carbohydrate goaL 
Grain products are required also to provide energy in the modified 
diet to replace energy provided in the diet by several sources, such 
as the carbohydrate from larger quantities of sugar, the fat from whole 
milk and less-well-trimmed meat, and fat and protein from larger 
quantities of meat and eggs. Increased quantities of vegetables and 
fruit also help provide the needed carbohydrate. Calories from sugar r 
other sweets, and soft drinks are limited by the sugar goal. 

Protein. — The number of calories from protein in the man's diet is 
the same as in his diet modified to meet the Goals, each representing 
14 percent of his total calorie needs. However, the food sources of 
protein differ. The increased quantities of grain products, required to 
provide the carbohydrate goal, also provide protein. Therefore, the 
amount of protein from animal products must be reduced if protein 
is limited to provide only 14 percent of calories. 



38 



Fat. The man must reduce his fat consumption by 350 calories per 

day— from 1.200 calories to 850 calories — to meet the goal of 30 per- 
cent of total calories from fat. Changes in the composition of the milk 
and meat groups under Option 1 and the reduction in quantities of 
meat and eggs account for a reduction of over 300 calories. 

The suggestion that skim milk be used in place of whole milk ap- 
pears to be unnecessarily restrictive as a means of reducing levels of 
fat and saturated fatty acids, especially in children's diets. Children's 
diers with whole milk, cheese, and ice cream replaced by their calcium 
equivalent in skim milk and other assumptions in Option 1 and then 
modified to meet the Goals contain as much as one-half more fats 
and oils than children ordinarily consume (table 6). Some of the fat 
from milk has been reintroduced into the diet as fats and oils. 

Sugar. — Sugar other than that found naturally in foods in the man's 
diet provides 400 calories and must be reduced by 25 percent to provide 
300 calories to meet the goal. To accomplish this, quantities of sugar, 
sirup, jams, jellies, candies, and soft drinks are decreased to provide 
140 fewer calories. The quantity of commercially prepared grain prod- 
ucts, increased to help meet the goal for complex carbohydrate, adds 
over 50 calories from the sugar they contain. Sugar levels in chil- 
dren's diets, somewhat higher than in men's diets, would have to be 
reduced by as much as 44 percent to meet the goal. 

Food as served. — A day's food for the man, as served, illustrates the 
large quantity of grain products in diets modified to meet the Goals 
under Option 1 (table 8). His modified diet contains 2y 2 to 3 bowls 
of cereal or pasta and 13 slices of bread or equivalent in other bakery 
products, increased from 1% bowls and 8 slices in his usual diet. The 
woman's modified diet contains 3% bowls of cereal or pasta and 8 
slices of bread or equivalent. The larger amount of cereal in her diet 
is needed to help provide recommended amounts of iron. 

Sample meals for a day for the man meeting the Goals with Option 1 
are as follows : 

BREAKFAST 



Cereal (2 cups) with sugar 7 
Skim milk (1 cup) 
Toast (3 slices) 



Margarine 7 
Juice (!/£ cup) 
Coffee or tea, if desired 



LUNCH 



Macaroni salad (1 cup) Vegetable (y 2 cup) 

(contains macaroni, % egg, Bread (3 slices) ' 

2 tablespoons kidney beans, Margarine 

Balad oil) Milk (i/ 2 cup) 



DINNER 



Lean meat, poultry, or fish Bread (3 slices) 

(5 ounces) 8 Margarine 

Potato (i/ 2 cup) Cake 

( fther vegetable or salad Coffee or tea, if desired 
(1/2 cup) 



■ AlM.ut J t il,!. spoons of sutrnr or oilier sweets such as sirup, jams, and jollies and 3% 
tjil.l< sj)oonH of fats und oils in a day may he added to foods dining preparation or at the 

tat»lf. 

• Meat and poultry or fish are served on alternate days. 



39 



SNACK 

Biscuits (3) Juice (i/ 2 cu p) 

For the people who may find large amounts of grain products ob- 
jectionable, diets were modified to meet the Goals while holding the 
amounts of grain products at levels in the consumption patterns (ta- 
ble 9). Such diets contain large amounts of vegetables and fruits. For 
example, the man would buy and use each day over 3 pounds of vege- 
tables and fruits and 2% ounces of dry legumes and nuts. His usual 
consumption of dry legumes would be quadrupled; of potatoes, tri- 
pled; and of other vegetables and fruit, doubled. His consumption of 
milk would be increased by 60 percent ; and meat, poultry, and fish 
would be reduced by 50 percent. Obviously, diets could be modified to 
include some increase for grain products and smaller increases for 
vegetables and fruits than those above. 

The "average'' man 20-64 years old can meet the Goals and his 
EDA while continuing to eat the quantity and selection he ordinarily 
consumes of any single food group, even the eggs and sugar and sweets 
groups. However, his resistance to change for a food group will re- 
sult in changes for certain other food groups that are greater than 
shown for Option 1 (table 6). For example, he could continue to have 
quantities of whole milk, cheese, and ice cream he is accustomed to and 
reduce fat, especially saturated fat, in his diet by other means, such 
as reducing further the quantities of meat, eggs, and fats and oils in 
his diet. 

Diets that meet the Goals, Option 4 

Option 4 assumptions (page 5) are used to illustrate what diets 
meeting the Goals might be like if consumers use foods that are •pri- 
marily unprocessed, low in fat and saturated fatty acids and refined 
and processed sugars, and high in complex carbohydrate (table 13). 
Generally, the diet contains skim milk; eggs, dry legumes and nuts; 
lean meat from Good Grade beef and flesh from poultry or other items 
of comparable low fat composition; vegetables and fruit; rice or va- 
rieties of otner grains or flour of comparable high carbohydrate com- 
position: soft margarine and vegetable oils; sugar and sweets. Elimi- 
nation of most of the fat from milk and meats, and the sugar and fat 
from grain products frees fat and sugar and the calories associated 
with them for use elsewhere in the diet. Much of the carbohydrate 
goal is provided efficiently by the 514 cups of cooked rice or equiv- 
alent grain or flour, leaving most of the protein goal to be provided by 
milk and meat. The man can have more identifiable fats and oils and 
sugar and sweets; however, his diet as a whole, will be less rich in fat 
and less sweet than the diet he ordinarily consumes. 

Food cost 

Co^ts were estimated for the average food consumption patterns and 
for diets modified to meet the Goals and the EDA using Option 1 and 
Option 4 assumptions. To estimate these costs, prices paid for food 
by 1965-66 survey households were updated using the percentage 



40 



change from the time of the survey to August 1977 in the average re- 
tail prices of about 100 foods priced monthly in U.S. cities by the 
Bureau of Labor Statistics. Costs apply only to diets as described in 
this study and cannot be used to indicate cost relationships for other 
diets modified to meet the Goals. These cost estimates, of course, do not 
allow for major shifts in price levels of foods which would almost cer- 
tainly occur if demands for certain foods were markedly increased to 
meet the Goals. 

The estimated weekly costs in August 1977 for a four-person family 
with average food consumption patterns and with diets modified to 
meet the Groals and the EDA, with Option 1 and Option 4 assump- 
tions 9 are as follows : 



Food Diet to meet goals 

consumption 

pattern Option 1 Option 4 



Child, 6 to 8 yr $10.47 $10.96 $11.71 

Child, 9 toll yr 13.02 13.72 14.71 

Male, 20 to 54 yr 15.46 14.88 16.65 

Female, 20 to 54 yr 12.21 11.57 12.40 



Total _ 51.16 51.13 55.47 



Limitations of interpretation 

The consumer could select many combinations of foods to meet the 
Goals. The few combinations presented here are designed for the least 
deviation from average food consumption patterns for men, women, 
and children of different ages required to meet the Goals, taking into 
account suggestions for food selection made in the committee report 
and alternative suggestions. Minimum disruption of average consump- 
tion patterns to meet nutritional goals is consistent with ARS's ap- 
proach in developing guidance for food selection for the general pub- 
lic. This approach recognizes that food habits are difficult to change 
and assumes that food guides that disrupt them the least are most 
likely to be followed. Other combinations of foods, arbitrarily selected 
to meet the Goals, might be more acceptable to some groups of people. 

( Jonsumption patterns used in developing the diets are based on data 
for food used at home in 1965-66, the most recent data on national 
household food consumption available. Current consumption, which 
will be understood better from our 1977-78 Nationwide Food Con- 
sumption Survey now underway, probably differs from -that in 1965- 
66. Annual USDA estimates of the national per capita food supply 
(disappearance data) can be used to indicate differences in consump- 
tion that may have oecurred since 1965. 

Changes in the food supply between 1965 and 1975 and changes to 
1965 66 consumption patterns required to meet the Goals are shown 
in table 10. For this comparison quantities of food groups in consump- 
tion patterns and in diets modified to meet the Goals for the 14 sex- 
:ige categories were weighted using 1975 population estimates; then 
change for the average person in the population was determined. For 

O^imA^ With diPtS m0dlfipd t0 ™* the G °«" « nd 



41 



sugar and grains an attempt was made to express quantities on a com- 
modity basis. The change for sugar represents the change when all 
sugar, including that in commercially prepared products, is taken 
into account; and the change for grain represents the change in the 
grain equivalent of grain products used. No attempt was made to 
take the eggs and fats from commercially prepared bakery products 
into account. 

The nutrition messages behind some of the Dietary Goals seem 
to have been heard and heeded by at least part of the U.S. population. 
Between 1965 and 1975 changes in food consumption, as indicated 
by the food supply, of eggs, butter, lard, margarine, vegetable oils, 
vegetables and fruit, and poultry and fish were in the direction of 
changes needed to meet the Goals. This implies that consumption has 
already moved toward meeting the Goals, and the changes for these 
foods based on 1965-66 food consumption patterns presented in this 
study with Option 1 may be somewhat exaggerated. On the other 
hand, for those foods for which the direction of change in the food 
supply between 1965 and 1975 is different from that required to meet 
the Goals — meat, vegetable shortening, sugar and sirup, grains, and 
milk — changes suggested in the study, with Option 1, may be under- 
estimated. 

Conclusions 

1. Few people in the United States consume diets that are as high 
in carbohydrate and as low in fat and sugar content as specified in the 
Dietary Goals proposed by the Select Committee on Nutrition and 
Human Needs. 

2. Alternative assumptions regarding food selections within certain 
food groups (options) are used in modifying diets to meet the Goals 
and the EDA for five vitamins and two minerals. Dietary changes 
generally include the use of more grain products, vegetables, fruits, 
legumes and nuts, and less sugar, meat, and eggs. The magnitude of 
the changes varies considerably for some foods depending on the 
option used. For example, to meet the Goals with Option 1, in which 
assortments of foods in the food groups below are based on average 
household food consumption in 1965-66 except as noted for milk, fats 
and oils, and meat, people on the average change the foods they buy 
and use to include — 

Sixty-nine percent more grain products (grain equivalent 
basis) ; 

Twenty-five percent more vegetables and fruit ; 

Twenty-one percent more dry legumes and nuts : 

Ten percent more milk, all in the form of skim milk ; 

About the same amount of visible fats and oils ; however, soft 
margarine and oil replace butter, lard, and vegetable shortening 
which are higher in saturated fatty acids ; 

Fifty-nine percent less visible sugar, sirup, jams, jellies, and 
candies ; 

Twenty-five percent less meat, poultry, and fish, with none of 
the drippings or separable fat from meat being consumed ; and 
Twenty- four percent fewer eggs. 



42 



On the other hand, to meet the Goals with Option 4, in which, 
through changes in food selection and/or production and processing, 
foods chosen are primarily unprocessed, low in fat and saturated fatty 
acids and refined and processed sugars, and high in complex carbo- 
hydrates, people on the average would change the foods they buy and 
use to include — 

Seventy-four percent more grain products (grain equivalent 
basis), all of which is rice or grain of similar composition; 
Forty-three percent more fruits and vegetables ; 
Thirty-nine percent more dry legumes and nuts ; 
Thirty-four percent more milk, ail in the form of skim milk; 
Twenty-two percent more visible fats and oils; however, soft 
margarine and oil replace butter, lard, and vegetable shortening 
which are higher in saturated fatty acids ; 

Ten percent less visible sugar, sirup, jams, jellies, and candies; 
Six percent less meat, poultry, and fish, which is one-half Good 
Grade beef roast Avith none of the drippings or separable fat con- 
sumed and one-half poultry with only the flesh consumed, or meat, 
poultry, and fish of similar composition ; and 
Seven percent fewer eggs. 

3. If goals are to be established for carbohydrate, protein, fat, sugar, 
cholesterol, and salt, such goals probably should be set separately for 
men. women, and children of different ages. Goals that restrict intake 
to a given amount per person per day of a dietary element, such as 
cholesterol and salt, result in diets with much more of the element per 
unit ofrenergy or per kilogram of body weight for children and women 
than for teenage boys and men, who have greater food energy needs. 
Some of the Dietary Goals and suggestions for modifying diets to 
meet them in the committee's report are not appropriate for use by 
individuals in all sex-age categories. For example, the goal for pro- 
tein — to provide 12 percent of energy — is so low that the pregnant 
woman meeting the protein goal and her RDA for energy will not 
meet her RDA for protein. The suggestion that skim milk be used in 
place of whole milk mav be unnecessarily restrictive as a means of 
reducing fat levels, especially in children's diets. 

4. Goals based on food consumption in terms of food disappearance 
data are not necessarily appropriate for developing guides for amounts 
of foods to buy to meet the nutritional needs of family members or for 
deyelopimg guides for food intake of individuals. The intended use of 
tli' goals and the adequacy of detail on food consumption and asso- 
ciated food eomposition data are some of the factors M be eonsidered 
in determining whether data on household food use, food intake of 
individuals, or both should be used as the basis for goals and their 
interpretation in terms of food. The protein goal in the proposed 
Dietary <Steak is an example of the importance of selection of the 
appropriate food consumption data base. The aim of the committee 
in setting (he protein goal was to retain the level in the current diet; 
therefore, n <r (); ,l „f jo p Prmi i f ,f energy based on disappearance data, 
\vas_ established. Yet in the "current diet" as defined by USDA's 
1 W> Survey on household food use. protein provides 14 percent of 
energy; and in the current diet as defined by the intake of individuals 



43 



reported in USDA's 1965-66 Survey and in DHEW's more recent 
Health and Nutrition Examination Survey, protein provides about 16 
percent or more of energy. 
Where do we go from here? 

As the basis for developing food selection guides for use of the gen- 
eral public and in administering the food programs, USDA has made 
and must continue to make decisions about acceptable levels of fat, 
carbohydrate, protein, sugar, cholesterol, and other elements in the 
diet. To help in making these decisions, the Food and Nutrition Board 
of the National Academy of Sciences has agreed to make recommenda- 
tions, even though they "may be provisional, as to acceptable levels of 
14 dietary elements beyond those for which RDA are established. 
Levels will be recommended for healthy men, women, and children 
of different ages. Among the 14 dietary elements are those covered by 
the Dietary Goals. The Board will include as a part of its considera- 
tions the important issues raised by the Select Committee on Nutrition 
and Human Needs and subsequent statements and studies. We hope to 
use these recommendations and the RDA's as the basis for nutritional 
specifications for revising the USDA food selection guides, after the 
information on food consumption of households and individuals from 
the 1977-78 Nationwide Food Consumption Survey is available. 

The Dietary Goals report and discussions that it has evoked reem- 
phasize the need for additional research : 

1. To determine the nutritive value of foods in the marketplace. 

2. To provide timely information on the food selections and nutri- 
tional status of people. 

3. To provide a firm basis for dietary goals for healthy men, women, 
and children of different ages. 

4. To explore adjustments in production and processing to provide 
foods that will be helpful in meeting such goals. 

5. To develop strategies and guidance materials for encouraging 
consumers to change their food behavior as necessary to meet the goals. 

TABLE 1.-F00D ENERGY DISTRIBUTION AND CHOLESTEROL CONTENT OF FOOD CONSUMPTION PATTERNS, 

1965-661 



Child, Child, Male, Female, 
Dietary 6 to 9 to 20 to 20 to 



Item goals 8 yr 11 yr 54 yr 54 yr Person 2 



Percentage of food energy from: 

Protein 12 14 14 14 14 14 

Carbohydrate E5-60 49 49 44 47 47 

Sugars 10 18 18 14 16 16 

Fat 30 38 37 4? 39 40 

Linoleic fatty acid " 10 6 6 7 6 6 

Oleic fatty acid MO 15 15 17 16 16 

Saturated fatty acids 10 14 13 14 14 14 

Milligrams of cholesterol per day 300 312 386 553 374 412 



1 Food as purchased or brought into the kitchen from garden or farm to provide meals and snacks for individuals by 
sex and age, estimated from 1965-66 household food consumption survey. Amounts of food fcr each sex-age category 
were increased or decreased proportionately to provide the 1974 recommended dietary allowance for energy plus 5 per- 
cent—to allow for some discard of food and still provide for energy needs. Drippings and one-half of the separable fat 
from meat are assumed discarded. 

2 Food consumption patterns for 14 sex-age categories weighted by the 1975 U.S. population, 
s Sugar other than that found naturally in foods, such as milk and fresh fruit. 

* Goal for all polyunsaturated f^tv acids. 
« Goal for all monounsaturatcd fatty acids. 



98-723—77 4 



44 



TABLE 2.— SOURCES OF FOOD ENERGY FROM SELECTED FOOD GROUPS 



[In percent! 







Carbo- 






Item 


Total 


hydrate 


Protein 


Fat 


Dietary goals . 


100 


58 


12 


30 


Consumption pattern: 1 


100 


30 


21 




Milk cheese ice cream 


49 


Eggs 


100 


2 


33 


65 


Drv beans and peas, nuts 


100 


34 


18 


48 


Meat, poultry, fish ' 


100 


2 


36 


62 


Dark-green, deep-yellow vegetables 


100 


81 


14 


5 


Citrus fruit, tomatoes... 


100 


87 


8 


5 


Potatoes . 


100 


72 


9 


19 


Other vegetables, fruit. 


100 


86 


9 


5 


Cereal, pasta 


100 


84 


11 


5 


Flour, mixes.. 


100 


83 


10 


7 


Bread 


100 


77 


13 


10 


Other bakery products. ... 


100 


62 


7 


31 


Fats, oils 


100 


2 




98 


Sugar, sweets . 


100 


94 




5 


Option 1 assumptions: 










Milk, skim 


100 


56 


39 


5 


Meat, poultry, fish 3 


100 


2 


44 


54 


Option 4 assumptions: 










Meat, poultry 4 


100 





68 


32 


Cereal s 


100 


89 


8 


3 



' Average selections within food groups as used by U.S. households in 1965-66. 

2 Drippings and Yz of separable fat from meat are assumed as discarded. 

3 Drippings and all separable fat from meat are discarded and amounts of meat, poultry, and fish are adiusted to Yz meat 
and Yz poultry and fish. 

1 Yz good grade boned beef rump roast with drippings and all separable fat discarded and Y broiler chicken with drip- 
pings and skin discarded. 
s Yz raw brown rice and Yz white enriched parboiled rice. 



45 



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50 



TABLE 8.-A DAY'S FOOD, AS SERVED, IN DIETS MODIFIED TO MEET THE GOALS BUT NOT NECESSARILY THE 
RDA.i AND FURTHER MODIFIED TO MEET THE RDA. 2 OPTION 1 



Meet goals, not necessarily RDA Meet goals 

— — - and RDA: 

Child, Child, Male, Female, female, 

Food s and unit 6to8yr« 9tollyr< 20 to 54 yr * 20 to 54 yr 20 to 54 yr 



1.7 1.3 1.2 

3. 1 4. 3 5. 3 

2.0 1.3 1.8 

2.7 2.2 1.6 

2.3 1.9 1.4 

2. 6 2. 3 2. 5 

2.7 2.1 3.5 

12.9 8.6 8.0 

3.6 2.5 2.9 

6. 7 4. 7 4. 7 



1 Recommended dietary allowance (RDA) plus 5 percent for energy distributed as 30 percent or less from fat, 14 per- 
cent or less from protein, 56 percent or more from carbohydrate, and 10 percent or less from sugar other than that found 
naturally in foods such as milk and fresh fruit. Saturated fat provides 10 percent or less of energy intake and cholesterol 
intake is limited to no more than 300 mg per day plus 5 percent. 

2 RDA plus 5 percent for vitamin A yalue, thiamin, riboflavin, niacin, ascorbic acid, calcium, and iron. 

3 The assortment of meats, vetetables, and other groups of foods is based on food consumption of U.S. households in 
1965-66. 

4 Diet modified to meet the goals also meets the RDA for the 5 vitamins and 2 minerals studied. 
5 1 serving is approximately 1 oz of dry cereal. 



TABLE 9.— CHANGE IN FOOD CONSUMPTION PATTERNS • REQUIRED TO MEET THE GOALS AND THE RDA, 2 OPTION 1, 
WHEN THE USE OF GRAIN PRODUCTS IS HELD AT LEVELS IN THE PATTERNS 



[In percent) 






Child, Child, Male, 


Female, 






6 to 8 9 to 11 20 to 54 


20 to 54 




Food group 


yrs 


yrs 


yrs 


yrs 


Person* 


Milk, cheese, ice cream 


45 


46 


61 


-10 


32 


Eggs 


-41 


-33 


-32 


36 


-8 


Dry beans and peas, nuts 


209 


221 


320 


568 


353 


Meat, poultry, fish . 


-67 


-57 


-51 


-55 


-53 


Dark-green, deep-yellow vegetables 


98 


98 


123 


273 


167 


Citrus fruit, tomatoes 


90 


89 


110 


111 


104 


Potatoes 


163 


162 


207 


112 


165 


Other vegetables, fruit 


93 


92 


115 


147 


119 


Cereal, pasta _. 

















Flour, mixes 

















Bread 

















Other bakery products 

















Fats, oils 


33 


27 


-31 


-37 


-18 


Sugar, sweets 


-56 


-59 


-44 


-62 


-54 



1 Food consumption in terms of food groups defined as option 1. Average selections within food groups as used by U.S. 
households in 1965 66 are assumed except (1) drippings and all separable fat from meat are discarded, and the amount 
of meats, poultry, and fish are adjusted to V 2 meat and Y 2 poultry and fish; (2) milk and dairy products are replaced by 
their calcium equivalent in skim milk; (3) butter and margarine are replaced by soft margarine, and lard and vegetable, 
shortening are replaced by vegetable oils. 

' Recommended dietary allowance plus 5 percent for energy, vitamin A value, thiamin, riboflavin, niacin, ascorbic acid, 
calcium, and iron. Energy intake is distributed as 30 percent or less from fat, 14 percent or less from protein, 56 percent 
or more from carbohydrate, and 10 percent or less from sugar other than that found naturally in foods such as milk and 
fresh fruit. Saturated fat provides 10 percent or less of energy intake and cholesterol intake is limited to no more than 
300 mg per day plus 5 percent. 

» Food consumption patterns and modified diets for 14 sex-age categories weighted by the 1975 U.S. population. 



Skim milk (cup) 2.9 3.3 

Eggs (number per week) 2.8 3.7 

Mature beans or peas, cooked (table- 
spoon) 1.9 2.1 

Meat, boned cooked lean (ounce) 1.3 1. 8 

Poultry and fish, cooked boned (ounce).. 1. 1 1. 5 

Vegetables and fruit (cup) 2.0 2.5 

Cereal, pasta (ounces) 2.9 3.4 

Bread or equivalent in bakery products 

(slices) 7.8 10.1 

Margarine, oil (tablespoon) 3.4 4.1 

Sugar, sweets (tablespoon) 6.0 7.0 



51 



TABLE 10. — CHANGE IN 1965-66 FOOD CONSUMPTION PATTERNS REQUIRED TO MEET THE GOALS AND THE RDA 
OPTION li AND CHANGE IN THE NATIONAL PER CAPITA FOOD SUPPLY FROM 1965 TO 1975 

[In percent) 



Change in Change in 

1965-66 food supply 

consumption 1965 to 

Food to meet goals 1975 



Milk 10 -8 

Eggs -24 -11 

Dry beans and peas, nuts 21 1 

Beef, pork, veal, lamb —48 7 

Poultry, fish 40 5 

Potatoes 27 5 

Other vegetables, fruit 24 7 

Wheat, corn, oats, rice, and other grains 69 —4 

Butter 2 100 -25 

Lard 2 100 -58 

Margarine 52 13 

Vegetable shortening 2 100 23 

Oils 73 44 

Sugar, sirups 3 . -32 3 



1 The 1965-66 food consumption patterns for men, women, and children were modified to meet the goals and the RDA 
using assumptions defined as option 1, and weighted by the 1975 population. 

2 Replaced by margarine and oils, which are higher in polyunsaturated fatty acids. 

3 Includes sugar in commercially prepared foods, such as ready-to-eat cereals, canned fruit sirup, and bakery products 



TABLE 11.— CHANGE IN FOOD CONSUMPTION PATTERNS 1 REQUIRED TO MEET THE GOALS AND THE RDA, 2 

OPTION 2 

(In percent] 



Food group 



Milk, cheese, ice cream 

Eggs 

Dry beans and peas, nuts 

Meat, poultry, fish 

Dark-green, deep-yellow vegetables. 

Citrus fruit, tomatoes 

Potatoes 

Other vegetables, fruit 

Cereal, pasta 

Flour, mixes 



Other bakery products. 

Fats, oils 

Sugar, sweets 



Child, 6 
to 8 yrs 


Child, 9 
to 11 yrs 


Male, 20 
to 54 yrs 


Female, 20 
to 54 yrs 


Person 3 


-12 


-10 


4 


4 


1 


-18 


-18 


-64 


5 


-33 


56 


58 


17 


44 


35- 


-22 


-16 


-23 


-33 


-26 


19 


18 


18 


53 


31 


16 


15 


16 


21 


17 


26 


24 


28 


17 


22 


16 


15 


16 


26 


19 


108 


102 


116 


207 


129 


81 


77 


92 


79 


84 


68 


65 


73 


60 


64 


5 


5 


37 


-10 


13 


-39 
-69 


-38 
-71 


-49 
-62 


-34 
-65 


-42 
-66 



1 Food consumption in terms of food groups defined as option 2. Average selections within food groups as used by U.S. 
households in 1965-66 are assumed except (1) drippings and all separable fat from meat are discarded; (2) milk is replaced 
by 2 percent fat milk; (3) butter is replaced by margarine, and lard is replaced by vegetable shortening. 

2 Recommended dietary allowance plus 5 percent for energy, vitamin A value, thiamin, riboflavin, niacin, ascorbic acid, 
calcium and iron. Energy intake is distributed as 30 percent or less from fat, 14 percent or less from protein, 56 percent 
or more from carbohydrate, and 10 percent or less from sugar other than that found naturally in foods such as milk ancf 
fresh fruit. Saturated fat provides 10 percent or less of energy intake and cholesterol intake is limited to no more than 300 
mg per day plus 5 percent. 

3 Food consumption patterns and modified diets for 14 sex-age categories weighted by the 1975 U.S. population. 



52 



TABLE 12. — CHANGE IN FOOD CONSUMPTION PATTERNS i REQUIRED TO MEET THE GOALS AND 
THE RDA.2 OPTION 3 

[In percentl 

Child, Child Male, Female, 

6to8yr 9 to 11 yr 20 to 54 yr 20 to 54 yr Person » 

Milk, cheese, ice cream 

Eggs 

Dry beans and peas, nuts 

Meat, poultry, fish 

Dark-green, deep-yellow vegetables 

Citrus fruit, tomatoes 

Potatoes 

Other vegetables, fruit 

Cereal, pasta _. 

Flour, mixes 

Bread 

Other bakery products _.. 

Fats, oils 

Sugar, sweets 



-13 


-12 


-10 


3 


-0 


-15 


-15 


-65 





-31 


71 


73 


88 


60 


73 


-32 


-26 


-26 


-37 


-33 


16 


15 


17 


55 


31 


13 


13 


14 


18 


15 


25 


24 


27 


15 


21 


14 


13 


14 


24 


17 


119 


114 


124 


214 


141 


89 


86 


96 


93 


94 


75 


72 


80 


67 


72 


17 


16 


21 


-12 


8 


-82 


-81 


-70 


-56 


-71 


-71 


-73 


-59 


-65 


-66 



1 Food consumption in terms of food groups defined as option 3. Average selections within food groups as used by U.S. 
households in 1965-66 are assumed except drippings and Yi of the separable fat from meat are discarded. 

- Recommended dietary allowance plus 5 percent for energy, vitamin A value, thiamin, riboflavin, niacin, ascorbic 
acid, calcium, and iron. Energy intake is distributed as 30 percent or less from fat, 14 percent or less from protein, 56 
percent or more from carbohydrate, and 10 percent or less from sugar other than that found naturally in foods such as 
milk and. fresh fruit. Saturated fat provides 10 percent or less of energy intake and cholesterol intake is limited to no more 
than 300 mg per day plus 5 percent. 

s Food consumption patterns and modified diets for 14 sex-age categories weighted by the 1975 U.S. population. 



TABLE 13.— CHANGE IN FOOD CONSUMPTION PATTERNS REQUIRED TO MEET THE GOALS AND THE RDA, « OPTION 4a 



[In percent] 





Child, 


Child, 


Male, 


Female, 




Food group 


6 to 8 yr 


9 to 11 yr 


20 to 54 yr 


20 to 54 yr 


Person » 


Milk, cheese, ice cream _. 


26 


27 


47 


30 


34 


Eggs 


17 


21 


-51 


35 


-7 


Dry beans and peas, nuts 


16 


23 


19 


88 


39 


Meat, poultry, fish . 


7 


13 


6 


-29 


-6 


Dark-green, deep-yellow vegetables 


31 


31 


43 


92 


63 


Citrus fruit, tomatoes 


32 


31 


35 


49 


40 


Potatoes 


34 


34 


37 


41 


35 


Other vegetables, fruit 


31 


31 


36 


56 


44 


Grain ' 


45 


44 


54 


138 


74 


Fats, oils 


91 


81 


38 


-53 


22 


Sugar, sweets 


-21 


-22 


8 


-15 


-10 



1 Recommended dietary allowance plus 5 percent for energy, vitamin A value, thiamin, riboflavin, niacin, ascorbic acid, 
c alcium, and iron. Energy intake is distributed as 30 percent or less from fat, 14 percent or less from protein, 56 percent or 
more from carbohydrate, and 10 percent or less from sugar other than that found naturally in foods such as milk and fresh 
fruit. Saturated fat provides 10 percent or less of energy intake and cholesterol intake is limited to no more than 300 mg 
per day plus 5 percent. 

i Food in terms of food groups defined in option 4. Average selections within food groups as used by U.S. households in 
1965-66 are assumed except (1) amounts of meat, poultry, and fish are adjusted to H good gradtf beef rump roast and H 
chicken broiler and all drippings and separable fat from the roast and drippings and skin from the chicken are discarded, 
(2) milk and dairy products are replaced by their calcium equivalent in skim milk, (3) butter and margarine are replaced by 
soft margarine, and lard and vegetable shortening are replaced by vegetable oils; (4) grain products are replaced by their 
grain equivalent in rice— H raw brown and 3^ white enriched parboiled rice. 

* Food consumption patterns and modified diets for 14 sex-age categories weighted by the 1975 U.S. population. 

< The amount of cereal in the consumption pattern is the grain equivalent of the 4 grain products food groups. Other 
ingredients in grain products, such as fat and sugar, are excluded from the consumption pattern. 



53 



TABLE 14— CHANGE IN FOOD CONSUMPTION PATTERNS I REQUIRED TO MEET THE GOALS, WITH 12 PERCENT OF 
ENERGY FROM PROTEIN (BASED ON DISAPPEARANCE DATA), AND THE RDA,* OPTION 1 



(In percent! 





l/WIO, 


LnilCl, 


M 1 

Male, 


remale, 




Food group 


6 to 8 yr 


9 to 11 yr 


Oft In £A nr 

£.[) to 04 yr 


Ofi */•» £A t«r 

to 04 yr 


Person » 


M II U 


c 


c 



c 



Q 


o 



Eggs _ 


-43 


-39 


-40 


6 


-27 




—38 


—34 


—25 


50 


— 10 


Meat, poultry, fish 


-63 


-58 


-55 


-71 


-61 


Dark-green, deep-yellow vegetables 


24 


23 


23 


72 


40 


Citrus fruit, tomatoes 


26 


24 


24 


32 


26 


Potatoes 


36 


34 


36 


28 


32 


Other vegetables, fruit.. 


25 


23 


23 


40 


29 


Cereal, pasta 


99 


95 


126 


291 


157 


Flour, mixes 


81 


78 


103 


89 


92 


Bread 


56 


54 


74 


74 


64 


Other bakery products __ 


43 


40 


48 


-11 


26 


Fats, oils 


68 


59 


-1 


9 


17 


Sugar, sweets 


-65 


-67 


-60 


-66 


-63 



1 Food consumption in terms of food groups defined as option 1. Average selections within food groups as used by U.S. 
households in 1955-66 are assumed except (1) drippings and all separable fat from meat are discarded, and the amounts of 
meats, poultry, and fish are adjusted to H meat and y 2 poultry and fish; (2) milk and dairy products are replaced by their 
calcium equivalent in skim milk; (3) butter and margarine are replaced by soft margarine, and lard and vegetable shorten- 
ing are replaced by vegetable oils. 

2 Recommended dietary allowance plus 5 percent for energy, vitamin A value, thiamin, riboflavin, niacin, ascorbic acid, 
calcium, and iron. Energy intake is distributed as 30 percent or less from fat, 12 percent or less from protein, 58 percent or 
more from carbohydrate, and 10 percent or less from sugar other than that found naturally in foods such as milk and fresh 
fruit. Saturated fat provides 10 percent or less of energy intake and cholesterol intake is limited to ho more than 300 mg 
per day plus 5 percent. 

1 Food consumption patterns and modified diets for 14 sex-age categories weighted by the 1975 U.S. population. 



U.S. OUTLOOK IN 
WORLD PERSPECTIVE 



THE WORLD FOOD ECONOMY: A DEVELOPED 
COUNTRY VIEW 

(By Geoff Miller, Director, Bureau of Agricultural Economics, Canberra, 

Australia) 



In my remarks to you this evening, I have been asked to take up 
some of the issues raised in Lynn Daft's paper "From a developed 
country viewpoint." This is no mean assignment for an Australian. 
Developed country agriculture is characterized by policies aimed at 
domestic self-sufficiency in food supplies, and income support for 
producers. A by-product of these policies is periodic surpluses and 
deficits. These fluctuations are responsible for much of the instability 
in world trade. As a result of unstable markets and access difficulties, 
many Australian rural industries are contracting despite the abundant 
supply of resources available for farm production. 

Even an Australian from an objective and professionally inde- 
pendent an agency as the Bureau of Agricultural Economics, would 
find it difficult to view the emerging world agricultural situation from 
"a developed country viewpoint."' There are too many conflicts be- 
tween current practice and economic rationality for me to act as a 
spokesman for developed country agriculture. But nor would I wish 
at this Conference to argue a partisan Australian position. 

Both the Universal Declaration on the Eradication of Hunger and 
the recent U.S. Academy of Sciences World Food and Nutrition Study 
support the proposition that we have the physical resources and know- 
how to deal with the world food problem. Many have concluded that 
all that is needed is the political will. 

In a sense this conclusion is a correct one. But in a very important 
sense it is not. In a moment I shall explain this contradiction but let 
us first break the world food problem up into two parts. 

ADEQUACY OF SUPPLIES 

One part is the adequacy of world food supplies and the capacity 
of the world to feed the impoverished and undernourished. The other 
part, identifiably separate though related, is the question of world 
food security. Til come back to the food security issue in a moment or 
two. 

The world most certainly has the capacity to feed itself. Malthus 
was wrong, is wrong and will remain wrong. Unfortunately his hy- 
pothesis will continue to be revisited by pseudointellectual writers — 
people seeking a quick way to fame and fortune in the publication 
world. These people make a brief (even if sometimes intellectually 
brilliant) stopover in an area too complex to be understood in even an 
extended and serious investigation. 

(57) 



58 



Such writings usually appear at times of temporary food shortage. 
The unfortunate part about them is that they galvanise public atti- 
t udes, so that any increase in the incentive to produce food is seen as a 
good thing. In fact these periodic surges in food production incentives 
generate, a few years later, surpluses that disillusion both producers 
and policymakers. Thus the seeds for the next shortage are sown. 

The 3.8 billion people in the world in 1978 had 21 percent more food 
per person than the 2.7 billion inhabiting the globe in 1954. During 
this period food production grew at an average annual rate of 2.8 
percent. So we are making progress. The problem with adequacy of 
food supplies is that if you express these figures on a per capita basis, 
there was an enormous disparity in the rate of growth in supplies in 
developed and developing countries. Per capita supplies increased at 
1.5 percent in the developed countries, but only O.-i percent in the devel- 
oping countries. It is, of course, relevant that most of the difference was 
attributable to different rates of population growth. 

Xevertheless there has been and will continue to be a steady improve- 
ment in the overall adequacy of food supplies. The problem is in the 
distribution of the benefits. This is an extremely important humani- 
tarian problem. It involves not only stimulating the growth in agri- 
cultural production in the less developed countries, but stimulating 
the rate of economic development itself. 

Given the political will to pay, there is no doubt that we could sub- 
stantially increase the rate of food production growth in the develop- 
ing -countries. Many of the measures taken in the aftermath of the 
World Food Conference will certainly assist in dealing with this 
fundamental long-term problem. 

But let us not forget that the problem of human poverty and under- 
nutrition is not just a question of increased food production. It is a 
process of economic and social transformation of whole nations of 
people. The political will must indeed be strong. 

WORLD FOOD SECURITY 

World food security has to do with fluctuations in the availability of 
supplies. There I think we are lacking in more than political will. 
What we have is a world of nation states, or blocs of nation states, each 
pursuing its own domestic farm policies for essentially its own domestic 
reasons. Then the individual surpluses or deficits generated by these 
policies are left to the world market to accommodate. Countries are 
like subsistence farmers — they meet their own needs from their own 
resources until something goes wrong. 

1 don't think we can legitimately blame individual countries for pur- 
suing the goal of food security through striving for self-sufficiency. 
Adequate food supplies on a reliable basis are something we in the food 
surplus count lies take for granted. I think the premiunUhat consumers 
in Westeiii Europe and Japan pay for food security — basically 
through paying high enough prices to ensure self-sufficiency — is as 
much a measure of failure of the international commodity trading sys- 
tem as it i< a reflection of the political power of their producers. If 
consumers in these countries could be shown an alternative way to 
reliable and secure food supplies, the power of the producer lobby 
would be considerably weakened. 



59 



If developed food deficit countries are not confident that they can 
obtain food security through trade, small wonder the developing coun- 
tries feel disillusioned. Countries responsible for abrupt shifts in de- 
mand and supply in world markets pay no price for the costs they 
impose on others. Countries who are regular and stable suppliers or 
reliable buyers receive no premium. Indeed, our residual world markets 
for agricultural products are as good an example of market failure 
as the failure of our domestic price mechanisms to charge for the ex- 
ternalities involved in pollution and environmental degradation. 

If mankind is to obtain the enormous benefits potentially available 
from increased specialisation and trade in agricultural products, new 
economic institutions will be needed. By that I do not mean new inter- 
national bureaucracies. Of course, efforts are currently being made, 
through the multilateral trade negotiations, to break down some of the 
barriers to international trade in farm producers. Efforts are also 
being made to regulate trade in sugar and grains through the negotia- 
tion of international commodity agreements. 

My own view is that these efforts are more an expression of political 
will, galvanised by the food crisis of 1973, than of the realisation of 
new insights into how to regulate and stabilize trade. The commodity 
agreements are a worthwhile endeavour, but unfortunately they are 
doomed to a difficult future. Agreements so far negotiated, or advanced 
as a basis for negotiation, are characterised by many of the same rigidi- 
ties that characterise most countries' domestic farm policies. 

Efforts are being made to fix prices, markets shares and stock levels 
at. arbitrary historically predetermined levels, rather than to provide 
a framework within which the dynamic economic forces of the world 
food economy can express themselves. Even bilateral agreements of 
this type encounter difficulties, such as those recently experienced in 
relation to the pricing provisions of the sugar agreement between 
Australia and Japan. In a multilateral framework, the difficulties are 
greatly compounded. 

In world commodity markets the individual decisionmaking unit is 
a country or large multinational corporation. Subject to some qualifi- 
cation, existing market mechanisms work reasonably well in short term 
(within crop year) pricing. But they work very poorly at the longer 
term end. What is needed is a dynamic institutional framework within 
which contracts can be negotiated and prices established with sufficient 
reliability to encourage major long-term investment in productive ca- 
pacity and storage. 

The longer term price mechanism needs to provide the incentive for 
appropriate stocks and trade volumes to be established and adjusted 
by the individual decisionmaking units (producing and consuming 
countries) rather than set these variables at historical or arbitrary 
levels. Volumes of trade need to be "normalised" without being 
straight] acketed. Countries who use the world market as a dumping 
ground for surpluses generated by too rigid domestic policies, or as a 
source of supplies to substitute for inadequate local storage, must be 
given incentives to desist. 

Efforts are being made to integrate some dynamic elements into 
commodity agreements and I have no doubt that emerging agreements 

9S-723— 77 5 



60 



have the potential to surpass their predecessors. Nevertheless if we 
are to obtain more permanent good security through these arrange- 
ments, many more rigidities are yet to be removed from both the 
structure of domestic price policies and the format of international 
institutional arrangements. 

Let me conclude, Mr. Chairman, by saying that future world food 
security requires something more than political will, statesmanship and 
negotiating skills. These things are necessary but not sufficient. A more 
concerted and fundamental scientific endeavour in the policy develop- 
ment field is also necessary. The issues are extremely complex and solu- 
tions will not be unearthed quickly or simply. However, I believe that 
we have now developed some useful ideas on where to begin. 

Without underestimating the difficulties. I hope that the work being 
embarked upon will yield dividends in the next few years. In the mean- 
time, world food securit3 T must remain heavily dependent on self- 
sufficiency in individual countries; on the stocks accumulated largely 
as a byproduct of domestic agricultural policies; on the still too rigid 
fabric of such international regulatory mechanisms as are negotiable ; 
and on a liberal dose of good luck ! This is unsatisfactory for hungry 
people, for efficient farmers in food exporting countries and ultimately 
for mankind. 



THE U.S. ECONOMIC OUTLOOK IN WORLD 
PERSPECTIVE 

(By Lyle E. Gramley, Member, Council of Economic Advisers) 



I'm delighted to be here this morning to talk with you briefly about 
the outlook for economic activity in the United States. 

I'd like to begin by reviewing some of the things that have been 
happening in the U.S. economy during the course of 1977 by way of 
providing a backdrop for probable developments next year. We got 
off to a very fast start this year in terms of the growth rate of eco- 
nomic activity. During the first half, our real gross national product 
increased at an annual rate of 6% percent. That large increase re- 
flected, in part, a rise in inventory investment from a very low level at 
the close of 1976 to approximately a normal level in relation to gross 
national product by the middle of this year. That source of stimulus is 
of necessity of a temporary character. Therefore, some slowdown in the 
pace of growth appeared to almost all forecasters inevitable. 

The actual slowdown that has occurred, however, has exceeded our 
expectations in terms of both duration and magnitude. During the 
third quarter, the real gross national product increased at a rate of 
only 3.8 percent, a rate of growth approximately in line with our long- 
run potential. This slowdown in the rate of expansion was reflected 
in a number of other measures as well. For example, during the 3 
months from June to September, industrial production in our coun- 
try went up at an annual rate of approximately 3 percent. That com- 
pares with a rate of increase from December to June of approxi- 
mately 7 percent. And the unemployment rate has been approximately 
flat at 7 percent since last April. Our economy has been growing fast 
enough to keep the unemployment rate from rising and absorb new 
entrants into the labor force, but not enough to make progress of the 
kind we want in getting the unemployment rate down. 

What, besides the slowdown in inventory investment, explains why 
our economy has been behaving relatively sluggishly recently ? I think 
there are several elements. First, the pace of consumer spending has 
been relatively sluggish since the first quarter. In real terms, per- 
sonal consumption expenditures have gone up much less than dispos- 
able income. Or to put it another way. the rate of personal savings 
relative to disposable income has risen quite sharply. 

This would be a worrisome development if it reflected a basic weaken- 
ing of consumer spending propensities. Fortunately, however, this 
does not appear to be the case. For example, attitudinal surveys taken 
by the Michigan Survey Research Center or the Conference Board 
indicate that consumer attitudes have deteriorated a little during the 
course of the spring and the summer but indices of confidence are about 
as high this fall as they were last spring. And the expansion of con- 

(61) 



62 



sumer Installment credit and the pace of housing and auto sales con- 
firm that consumers are still buying durable goods relatively freely. 
They are still increasing their purchases of homes. They are still ex- 
panding their installment debts. 

What then accounts for the rise in the personal savings rate and 
the associated slowdown in consumer spending? It is mainly the fact 
that during the first 2 years of the recovery the savings rate w r ent 
down to unusually low levels. It was driven down even further by 
special factors during the first quarter of this year, such as the cold 
weather which generated large fuel bills. During that quarter, the rate 
of personal savings relative to disposable income was just barely over 
4 percent, the lowest figure for any quarter since 1951. Some rebound 
in that savings rate was therefore inevitable. Consumer spending 
simply had to slow down. 

A second factor in the sluggish pace of economic activity has been 
the response of businesses to the weakening pace of consumer spend- 
ing. In the past, businesses typically have waited awhile to appraise 
new developing trends in consumer spending rather than reacting 
immediately. Consequently, a reduced pace of consumer spending has 
typically been reflected in a rise in the rate of inventory investment — 
which has tended to buffer rates of production and the level of employ- 
ment from the effects of changes in the pace of consumer spending. 
That did not happen last year when consumer spending slowed. And 
it did not happen again this year. Businesses are pursuing extremely 
cautious inventory policies and they have begun to make their adjust- 
ments in production immediately upon perceiving some change in the 
pace of consumer spending. This has some good aspects and some bad 
aspects. The bad aspects are that changes in the pace of consumer 
spending are reflected strongly and quickly in production, and there- 
fore, in employment, in consumer incomes, and in buying power. This 
tends to magnify the initial response of consumer spending. 

The good aspect is that businesses this year, as last, have kept their 
inventory-to-sales ratios in good order. An undesired buildup of in- 
ventories has not occurred. Inventories are still relatively lean so that 
when a pickup in consumer spending begins again, one may anticipate 
that, as we saw in the late months of 1976, a prompt rise in production 
and employment in response to the improved pace of consumer sales. 

A third factor in the relatively disappointing performance of our 
economy in the past couple of quarters has been the continuing drag 
exerted by our foreign trade position. In the third quarter of 1976, we 
enjoyed a surplus of net exports of goods and services of about $8 
billion. By the third quarter of this year, our trade position had 
switched markedly. Net exports of goods and services, as we meas- 
ure them in the gross national product accounts, were in deficit to the 
extent of about $12 billion. That switch from an $8 billion surplus to a 
$12 billion deficit is a drain of $20 billion of income tljat goes abroad. 
II acts, in effect, like an increase in taxes of $20 billion in terms of its 
effects on consumer purchasing power. 

The reasons for this continued movement towards deficit of our 
international trade position are quite well known. A major factor is 
that oil imports arc still very large. Another important factor, how- 
ever, lias been ( he very sluggish pace of our exports, reflecting the dis- 



63 



appointing recovery abroad. In general, most industrialized coun- 
tries have experienced even greater disappointment this year with the 
performance of their economies than we have. In particular, the pace 
of business investment has been sluggish worldwide and since we tend 
to be a heavy exporter of capital goods, that has taken its toll on 
our export position. 

A fourth factor in the performance of the economy this year has 
been some weakening in the rise of business investment. For example, 
between the second and third quarters, production of business equip- 
ment rose at an annual rate of only about 7 percent. That's about half 
the rate of increase that occurred from the fourth quarter of 1976 to 
the second quarter of this year. 

More worrisome even than the slowdown in the actual pace of busi- 
ness fixed investment has been some evidence that perhaps businesses 
are planning more cautiously for the future than they were earlier this 
year. Orders for nondefense capital goods have been behaving errati- 
cally in recent months but on balance they were a little lower in the 
third quarter of this year, in current dollar terms, than they were in 
the second quarter. In real terms — after adjusting for price changes — 
orders were down significantly. Moreover, private surveys of busi- 
nesss spending plans for next year suggest that the rise in busi- 
ness fixed investment outlays during 1978 might be somewhat smaller 
than it was in 1977. 

Reasons for this hesitancy in the prospective pace of business fixed 
investment are not fully evident. It may be that businesses are uncer- 
tain because of the delay of congressional passage of the energy pro- 
gram, particularly those businesses whose investments are critically 
related to the energy package. It maybe, also, that businesses have 
become more cautious because they fear the recovery could be faltering 
given the slowdown in the pace of consumer spending. If those two 
factors are important, one can make a reasonable case that the hesi- 
tancy in business fixed investment planning is more likely to reflect 
delays or postponement of spending programs than cancellations. That 
would suggest that we are likely to see some renewed strength building 
up over the course of 1978. 

We, at the Council of Economic Advisers, are still reasonably con- 
fident that activity is going to pick up soon and that a better growth 
rate of economic activity will emerge in statistics of the fourth quarter, 
for a number of reasons. 

First, the stimulus programs, introduced earlier this year by the 
administration and passed by the Congress, are gathering strength. 
They will be building up to peak force in the early part of 1978. They 
are gathering momentum now, will be adding to disposable income in 
the future, and will help to strengthen the growth of employment and 
consumer purchasing power. 

Second, other governmental expenditures are also rising, particu- 
larly defense purchases. The advance indicators of defense purchases 
began to show strength around the middle of 1976. Actual purchases 
by the Federal Government began to rise in the second quarter ; they 
showed another good growth in the third quarter, and we anticipate 
further expansion in the quarters ahead. The Federal pay raise is also 
adding sizably to disposable income this fall. 



64 



Third, the personal saving rate has risen a good deal from its low 
point at the first of this year. It's now back to a more normal level so 
that we can reasonably expect that as disposable income rises, personal 
consumption expenditures will begin to move up again. And with in- 
ventories relatively lean, we should see translation of rising consumer 
spending into increases in production and employment relatively 
soon. 

We can't be sure when the pickup will occur, but recent monthly 
statistics are consistent with the view that an upturn is fairly close 
at hand. Xew orders for durable goods have been rising more strongly 
recently. The aggregate of hours worked began to move up in Septem- 
ber and continued to rise in October. The most heartening sign is that 
recent figures on retail sales indicate a strengthening trend during the 
course of the summer months in consumer spending. October retail 
sales figures were released yesterday. They showed that in the month 
of October, we had an increase about 1% percent in total retail sales. 
From June to October, retail sales rose 12 percent at an annual rate. 
After allowance for the probable rise of prices, retail sales advanced 

5 to 6 percent, a much stronger rate than we have seen since March. 
Let me talk just a little bit about price developments thus far in 

1977 and then turn to the outlook for 1978. We've had some rather 
wide variations in the rate of price increase overall this year, but they 
have been largely due to developments affecting food prices. I would 
be carrying coals to Newcastle if I tried to tell this group what's been 
happening to food prices and why, and so I won't try. But let me men- 
tion that the food price situation has been extremely important in 
terms of the overall behavior of the price indexes. For example, the 
total of consumer prices during the first half of this year rose at an 
annual rate of 9 percent, but during the third quarter, with food prices 
at retail rising much more moderately, the consumer price index over- 
all rose at an annual rate of only 4 percent. Not all of that improve- 
ment was due to food prices, but a good part of it was. We did, fortu- 
nately, see some moderation in components of consumer prices other 
than food — nonfood commodities and, to some degree, services. 

Abstracting from the volatile movements of food and energy prices, 
however, the underlying inflation rate this year is still hanging in the 

6 to 6% percent range. For example, in September consumer prices 
excluding food and fuel were 6.1 percent above the year earlier figure. 
And wholesale prices of industrial commodities, excluding energy 
items, were 5.9 percent higher in October than a year earlier. 

Wage rate increases have also remained about where they were a 
year ago — at about 7 percent. Nonwage labor costs have been rising 
somewhat faster than wage rates, so that total compensation per hour 
worked is rising in the range of 8 to Sy 2 percent. That means with 
long-term growth of productivity around 2 percent, the underlying 
trend of industrial costs is in the 6 to GV2 percent range. 

That, of course, is our underlying rate of inflation — 6 to 6V2 percent. 
And it has remained there for the past 2 years. There's been no mate- 
rial change in that rate since the middle of 1975. Inability to make 
progress in reducing the underlying rate of inflation has been a major 
disappointment. But. at least one can sav that the rate is unlikely to 
change in the near future. In all probability. 1978 will witness a con- 
tinuation of an underlying rate of inflation in the range of 6 to 6i£ 
percent. 



65 



Let me just turn briefly to the outlook for 1978. The last official fore- 
cast put out by the administration was released in July. We will not 
release another official forecast until the one that accompanies the 
fiscal 1979 budget in January. But our tentative thinking at the 
Council of Economic Advisers is that we should be able to achieve a 
real growth rate of somewhere in the range of 414 to 5 percent for 
1978, measured year over year. Such a growth rate, we believe, could 
be achieved with no new fiscal stimulants other than what the adminis- 
tration has announced up to this time. That would still mean a sizable 
increase in Federal spending between fiscal year 1977 and fiscal 1973. 

The current projection of Federal outlays for fiscal 1978 implies a 
rise in total outlays of between 13 and 14 percent. A large part of 
that increase reflects the stimulus programs introduced earlier in 1977, 
and they will be reaching their maximum potential for stimulating the 
economy during the first half of calendar 1978. Thereafter, the thrust 
from those programs will be leveling out. 

Our expectations of a V/ 2 to 5 percent growth rate also assume a 
relatively accommodative monetary policy. We recognize that short- 
term interest rates may rise somewhat further, but we anticipate a 
relatively moderate rise. And if that moderate rise occurs, long-term 
interest rates will probably remain relatively stable as long as the rate 
of inflation stays well behaved. 

Let me talk just briefly about some of the major sectors of the econ- 
omy and what we might expect from them during the course of 1978 — 
beginning first with those from which we cannot realistically expect 
much stimulus. 

Consumer spending is. of course, the largest element of our gross 
national product. Consumers led the recovery for the first 2 years. 
We can't expect that to continue. The savings rate, though 
higher than it was at the beginning of this year, is still below what 
one might consider to be a normal rate. It's at about 5i/o percent. A 
normal rate would be in the range of percent or so. We anticipate, 
therefore, the possibility of some further rise in the saving rate, so 
that personal consumption expenditures probably will grow a little 
less rapidly than disposable income. A rise in real consumer spending 
in the range of 4 to 4i£ percent seems reasonable. 

The housing industry has also been a major source of stimulus 
during the past couple of years. We can't expect that to continue. 
Single family starts have surpassed earlier peaks, backlogs of demand 
have been filled, prices of houses are rising very rapidly, interest rates 
have also moved up somewhat. We probably will see a moderate fur- 
ther rise in residential construction in the next several quarters, but 
the thrust from that sector will diminish as 1078 goes on. 

For net exports, fortunately, we do not expect the drag to continue. 
We do not expect our net export balance to worsen, but we expect it 
to remain at somewhere around the 1977 level. We'll probably not 
see much rise in our oil imports next year. We don't have to rebuild 
stocks as we did this year following a cold winter. We do have some 
Alaskan oil production coming in. But, unfortunately, the outlook for 
our nonagricultural exports is still not very favorable. A number of 
industrial countries abroad have announced stimulative actions that 
are likely to result in an improvement in activity during 1978 (rela- 
tive to 1977). but it will be some time yet before a capital goods boom 



66 



develops around the industrial world that would give real life to our 
exports. 

The sectors from which we can expect stimulus next year are two 
in number. First, governmental spending and second, business fixed in- 
vestment. For governmental spending, as I indicated, the stimulus 
programs will be building up. Also, State and local government fi- 
nances are in better shape now than they were a year or two ago. We 
would anticipate a rise of governmental spending next year somewhere 
between 5 and 6 percent in real terms. 

If we're going to get the kind of growth we want, however, we've got 
to have a very strong rise in business fixed investment. Business capital 
outlays will need to rise somewhere in the range of 7 to 9 percent in 
real terms in 1978 to achieve the increase of 4% to 5 percent in real 
gross national product that we're looking for. 

Until the signs of hesitancy that I mentioned earlier became evident, 
a growth rate of 7 to 9 percent in real business fixed investment looked 
quite feasible. After all, profits had been rising through the recovery, 
the financial condition of businesses was and still is quite strong, and 
rates of capacity utilization have now risen to a point where in the 
past that had signaled to businesses the need to begin expanding their 
investment planning. A growth rate of 7 to 9 percent still seems re- 
alizable if some of the uncertainties we've seen recently begin to 
disappear, as we think they will. One helpful factor, I believe, will be 
the fact that the President will announce at some time fairly soon, after 
the energy program and Social Security programs have gone through 
Congress, a tax package that will help to strengthen business fixed 
investment. "Whether or not there will be any direct investment in- 
centives in such a package, such as an increase in the investment tax 
credit or some accelerated depreciation, is not clear. What is clear is 
that there will be measures that will be helpful in terms of business 
fixed investment. 

Our view of the outlook for 1978 at the Council of Economic Ad- 
visers is a fairly positive one. We see no major imbalances in the re- 
covery process to date. We believe that financial markets, though they 
are somewhat tighter than they were last spring, remain basically con- 
ducive to recovery. With inflation not likely to accelerate, some of the 
fears of a renewed inflationary outbreak have been allayed. We see 
no bottlenecks or shortage problems likely to develop to inhibit re- 
covery. And so we think recovery should continue at a reasonably good 
pace next year. 

We recognize, however, that others are somewhat less optimistic than 
we are. In particular, some forecasters are concerned about the possi- 
bility that the pace of economic expansion may slow as 1978 unfolds 
to an unacceptably low rate by the end of the year. 

The administration is cognizant of this potential problem. Over the 
next few months, the outlook for 1978 will be reassessed. If it appears 
that we are not moving up during the fourth quarter with the vigor 
we anticipate, or that the outlook for capital spending is weaker than 
wo think it will be, additional fiscal actions may be needed to reach our 
growth objectives for next year. Those actions could be most readily 
incorporated into the President's budget for fiscal year 1979. 



TRENDS IN U.S.S.R. AGRICULTURE 

(By Dr. Boris A. Runov, Vice-Minister of Agriculture, U.S.S.R.) 



Let me tell you briefly about the agriculture of the Soviet Union. 

It should be recalled that the agriculture of Tsarist Russia was 
one of the most backward in Europe. Almost half of all lands were 
in the hands of a small number of landlords. Thirty percent of all 
farms had no horses. One-third of the peasant farms did not even 
have wooden ploughs. The agriculture of prerevolutionary Russia 
was so backward that starvation was the common phenomenon. 

The very day after the victory of the socialist revolution, the decree 
of the land was accepted. It was the first time in history that Soviet 
leadership had solved the land problem in the interests of working 
peasants. As a result of the victory of the great October Revolution, 
peasants received over 375 million acres of land. 

Our country has passed a long and difficult way. Along the way 
it faced the struggle with foreign invasion. The Soviet people accom- 
plished a great deed in defeating German fascism in heavy battle. 

Over the past 60 years the population of the U.S.S.R. has grown 
1.7 times. The gross output of agricultural production has increased 
4.4 times. 

Now there are about 28,000 collective and about 20,000 state farms. 
These are large, economical strong farms. Collective and state farms 
account for about 90 percent of total commercial production. 

The average size of collective farms is 6,500 hectares. The average 
size of state farms is 19,000 hectares. 

There are over 2.5 million tractors and 1.5 million trucks on the 
farms. Soviet agriculture now consumes annually 80 billion kilowatt/ 
hours of electricity, almost twice the amount consumed in the country 
before 1940. 

Our objectives are: 

First: To provide the country with a steady supply of food and 
agricultura 1 raw material and to have sufficient reserves of agricul- 
tural products ; 

Second: To make the everyday social and cultural conditions of 
village and town more equal to each other. 

Our most important objective is to increase grain production. The 
average annual gross production of grain during the 10th 5-year plan 
(1976-80) should be increased by 35-40 million tons, compared with 
the 9th 5-year plan (1971-75) . 

Meat production is planned to be increased at least up to 17.3 mil- 
lion tons; milk, up to 100 million tons; and eggs, up to 67 billion/ 
year. During the current 5-year plan period our agriculture will re- 
ceive over 170 billion rubles or about 27 percent of total capital in- 
vestments in the national economy. 

(67) 



68 



What are the resources for increasing of our agricultural produc- 
tion? 

Our main resources are placed in fields : new high-yielding varieties, 
broad application of fertilizers, using minimum tillage, land reclama- 
tion. In animal husbandry : improvement of animal breeding, increas- 
ing livestock population, and most importantly, improvements in the 
quality and quantity of our feeding rations. 

In the current 5-year plan, agriculture will receive 1.82 million trac- 
tors, 1.35 million trucks, 538,000 grain harvesters, and 1.5 times more 
mineral fertilizers than in the previous 5-year period. 

The development of specialization and concentration of agricul- 
tural production on the basis of interfarm cooperation and agro- 
industrial integration will play a great role in increasing our efficiency. 

You might know that our specialized hog production operations in 
unit capacity are up to 100,000 head, and our milking operations are 
up to 4,000 cows. 

Incomes of collective farmers in 5 years will grow by 24 to 27 per- 
cent. There will be considerable growth in funds for public needs, 
which will be used for medical treatment, education, improvement of 
professional skills, and pensions. 

This year, which is far from being the best or even an average one 
in terms of weather conditions, the U .S.S.R. produced 194 million tons 
of grain, about 15 million tons of meat, and 8.4 million tons of cotton. 

Making a speech at the Jubilee Meeting on the occasion of the 60th 
anniversary of the October Revolution. Leonid Brezhnev said that our 
agrarian policy is oriented not only to current needs but also to the 
future. We are trying to find the* solution to the food problem, to 
satisfy the growing demands of the country, and we are doing this 
under conditions when the population and its requirements are in- 
creasing, but the acreages are the same. 

That is why we are planning accelerated, intensive development of 
all agricultural sectors in the future. 



WORLD AND U.S. AGRICULTURAL OUTLOOK 



(By J. Dawson Ahalt,* Acting Chairman, World Food and Agricultural Outlook 
and Situation Board, USDA) 



Farmers, consumers, businessmen, and policymakers have become 
increasingly aware in recent years of the strong interrelationships 
between United States and global food and agricultural developments. 
Indeed, these ties were dramatized in the early 1970's. All of us in 
this room know they have been emphasized again this year. 

To improve our understanding of United States and international 
developments, the Department has strengthened and integrated its 
outlook work in domestic and international areas. A specific step taken 
this year was the creation of the World Food and Agricultural Outlook 
and Situation Board to act as the Department's focal point for com- 
modity outlook situation information. In this role the Board reviews 
and clears all domestic and international economic commodity intel- 
ligence produced by the various agencies in the Department relating 
to the food and agricultural sector. The goal is to help insure that 
the public is setting the best possible outlook information given the 
resources available. 

This year the scope of the Outlook Conference has been broadened 
two ways. First, we have tried to integrate domestic and international 
developments more clearly than in the past. Second, we have struc- 
tured the program to bring more closely together agricultural and 
food issues, because they too cannot be viewed independently. We hope 
this new slant will strengthen our ability to analyze and present the 
outlook. 

THE SETTING 

Global supplies of food and other farm products continued abun- 
dant for the coming season for the second consecutive year. Big sup- 
plies of grains and increased crops of oilseeds, sugar crops, coffee and 
cotton have resulted in sharp declines over the past year in world 
prices of these crops. 

Larger food supplies are virtually assured for most areas of the 
world, despite the recently announced sharp drop in the 1977 Soviet 
grain crop estimate and some recent deterioration in crop prospects 
in Canada and Australia. Although food supplies are generallv abun- 
dant, thev are short in parts of Southeast Asia, Africa's Western 
Sahel, Afghanistan, and Ethiopia. 

Bigger world supplies of grains, oilseed, and meals have resulted in 
severely depressed prices and reduced returns to farmers. Yet people 
in many parts of the world have inadequate diets because of limited 



*The author appreciates the helpful assistance in preparing this paper from members of 
the Economic Research Service, the Foreign Agricultural Service, and the World Board. 

(69) 



70 



food supplies and high prices which most potential buyers living in 
abject poverty cannot afford. 

Some of the major issues bearing on the agricultural outlook and 
prospective returns for U.S. farmers and for farmers in most food 
exporting nations center around the access to and prosperity in foreign 
markets. Among the developed nations, which include the major ex- 
porters as well as major markets for food, trade barriers, and domestic 
policies affecting trade, prices, and returns to producers effectively 
limit the flow of world trade in grains, soybean meal, meats, and dairy 
products. As a result, high and relatively stable prices in some major 
markets are unable to adjust to changing world supply/demand con- 
ditions usually brought on by unpredictable fluctuations in world 
weather and growing conditions. Since supply variations usually bring 
sudden and sharp changes in prices and stocks, those markets which 
remain open in the world must absorb the wide price instability ag- 
gravated by the unresponsiveness of some large markets which are 
essentially insulated by domestic price policies and barriers to trade. 
Because of this whiplash effect, mainly on the open markets, although 
other world markets are affected as well, many nations are examining 
domestic and trade policies designed to counter these effects. Accord- 
ingly, there is interest in reducing barriers to trade, development of 
trade agreements, accumulation of international food reserves, and 
domestic farm programs that will help to iron out the peaks and val- 
leys in price fluctuations, improve world food security, and at the 
same-time strengthen returns to farmers. 

Equally complex, and perhaps less understood, are efforts to expand 
economic activity and food production in the developing countries. 
Both internal programs and external aid financial development activi- 
ties need to be carefully coordinated with policies in the developed 
nations in order to generally improve nutrition levels and provide 
more stability in food and agricultural markets. 

THE WORLD PICTURE 

First a look at the demand side for the coming year. Worldwide eco- 
nomic activity has slowed in recent months. However growth is pro- 
jected to average in the 4 to 41/2 percent zone for the developed nations. 
"Weakness is also expected in some developing nations in the latter half 
of 1 078. Although a continued moderate rate of investment in plant and 
equipment is expected into 1978 in the United States, prospective 
growth in domestic markets in other countries appears to be short of 
that needed to generate incentives for increased investment spending 
in early 1978. The combination of sluggish capital investment, low 
levels of industrial activity, and rising costs and prices have continued 
to keep nnemplovment at high levels as well as constrain growth in 
consumer demand in many developed countries. Moreover, increases in 
world trade could slow in 1978, barring some stimulus, to a rate of 
perhaps 5 or 6 percent compared with an increase this year of 8.5 per- 
cent. However, programs to stimulate activity in developed nations 
mav lead to increases in consumer demand and capital investment as 
well ns increase the risks of accelerating inflation. Thus, fear of infla- 
tion remains a key impediment to expansionary policies. 



71 



Following last year's record world grain crops and an enormous 
buildup in stocks, it now appears that global production of wheat and 
coarse grains in 1977 will likely total some 3 or 4 percent below the 1.1 
billion tons estimated for last year. The decline stems mainly from an 
estimated drop of more than 30 million tons in the U.S.S.R. Smaller 
declines are indicated for Canada, Australia, Argentina, Thailand, and 
Brazil. Most of the indicated decline is due to a cut of about 7y 2 per- 
cent in wheat production although the coarse grain crop also is ex- 
pected to drop around 2 percent below the 1976 crop. However, it is 
still early in the season, especially for Southern Hemisphere crops, and 
these estimates should be interpreted with a considerable band of un- 
certainty about them. 



WORLD GRAIN PRODUCTION, CONSUMPTION 
AND CARRY-OVER STOCKS (Actual values) 

MIL METRIC TONS 
1500 



Stock draw down 




CONSUMPTION 



800 — | 1 1 L_! I I I I I I I I i t i i 

1960/61 65/66 70/71 75/76 

250r 



J I 



80/81 



World 
Carryover 

Stocks 




100 



1960/61 



65/88 



70/71 



75/76 



U.S. 

Carryover 
Stocks 



80/81 



° NCLUDES WHEAT, RICE (ROUGH! MSD MAJOR AND MINOR COARSE GRAINS 

USDA NOVEMBER 1977 



72 



Food use of grains may increase only modestly — around 1 percent — 
but with big supplies of feed grains as well as relatively low prices and 
growing livestock output in many developed countries, world feed use 
will increase. The biggest increase is indicated for North America 
where feed grain supplies are large. Gains are also expected in areas 
such as Europe and Japan where grain prices play a less important role 
in allocating grain supplies. 

With modest gains in utilization, global carryover stocks of wheat 
and coarse grain are now indicated some 4 to 6 million tons below the 
relatively large 169 million ton carry-in. A small increase is indicated 
for coarse grain stocks, but it now appears the wheat carryover may run 
10 to 15 million tons below the estimated carry-in stocks of 97 million 
metric tons. Unlike the rest of the world, stocks will continue to buildup 
in the United States, possibly by around 15 million tons mostly in 
coarse grains. But stocks in the rest of the world will be smaller per- 
haps by around 20 to 25 million tons. By the close of the 1977-78 mar- 
keting year, U.S. grain (wheat and coarse grain) stocks may approxi- 
mate 75 million tons or nearly half of the world's carryover. Such 
stocks would represent about 7 percent of projected world grain utili- 
zation, the highest ratio since 1971-72. In 1974-75, U.S. grain stocks 
were only about 2.7 percent of world use. 

Trade estimates for wheat and coarse grain have been lifted in recent 
days reflecting the indicated drop in the Soviet crop and increased 
import requirements. U.S. farmers who have the bulk of the world 
grain available for shipping at this point in the season will supply 
much of the expected gain in world trade. The estimated gain in world 
trade will likely come mainly from stepped up movements of wheat. 



WORLD GRAIN TRADE 

MILLION : 




WORLD CARRYOVER STOCKS 




OF WHEAT AND COARSE GRAIN 




MIL. METRIC TONS 






150 




World \ / 




100 




• 1 • . 1 




60 


. . i , , i 






60/61 '63/64 '86/67 


•69/70 -72/73 75/76 78/7» 






Ma BIS 240* 77 


mi 



World rice crop prospects in 1977-78 enhance the global grain sup- 
ply picture by offsetting part of the decline indicated for other grains. 
A good monsoon over most of the Far East helped to produce a near 
record rice harvest. 

World output of oilseeds is expected to be record large in 1977-78, 
up 12 percent from last year. World oilseed meal production for 1978 
is now forecast at about 78 million tons (soybean meal equivalent), up 
17 percent from last season. The expected record U.S. soybean crop 
is largely responsible (accounting for 43 percent of global output). 
Gains are also likely for soybeans in Brazil and Argentina, rapeseed in 
Canada, and sunflower seed in the U.S. S. It. and South Africa. Fish- 
meal supplies in 1978 are uncertain after the precipitous decline indi- 



73 



cated for 1977. Demand for protein meals is expected to rise in both 
Western Europe and Japan as feeding of hogs and poultry continues 
to grow. The U.S.S.K. is projected to take about 1 million tons of U.S. 
soybeans. 

1976 PER CAPITA MEAT CONSUMPTION 

. , IN KILOGRAMS CARCASS BASIS 




Forecasts of world oil production (vegetable, animal, and marine 
oils and fats) indicate an output of about 53 million tons, 5 million 
tons above 1976's reduced volume and about 3.5 million above the 1976 
record. Production gains are indicated for soybeans, palm, cottonseed, 
sunflower, rapeseed. and olive oil. the United States will account for 
about one-third of the increase. 

World meat production is projected to increase only moderately in 
1977 compared with the sharp increases in recent years. Meat produc- 
tion (red meat and poultry) in the key commercial markets of the 
world — the United States, Canada, EC, and Japan — is estimated at 
46.4 million tons for 1977, up about 1 percent from 1976. Output of red 
meats in these commercial markets is expected to increase fractionally, 
while poultry output is projected to increase by 3 percent. For the red 
meats, a further decline in beef and veal supplies will be more than 
offset by gains for pork. 

The major uncertainty relating to next year's red meat production 
centers around the cattle cycle. If herd liquidation in the United States 
and Australia begins to bottom out by mid- to late-1978, the turn- 
around and some withholding of breeding stock will bring a further 
decline in beef and veal output in 1978. However, such a decline will 
likely be offset by increases in production of pork and poultry. 

Turning to the current world dairy situation, the surplus continues. 
Milk production for 1977 in 36 major producing countries will set am 
other record at 395 million metric tons, up 2 percent from 1976. A 
1-percent rise in fluid milk consumption was not large enough to absorb 
the increase in production. This has led to a shift of more milk into 
manufacturing uses. Cheese and butter production are running much 
larger, while nonfat dry milk (NFDM) output is expected to hold 
steady. World consumption of cheese continues to grow more rapidly 
than butter and NFDM. Hence, global butter stocks by the end of the 



74 



year are expected to be up 24 percent. While stocks of some manufac- 
tured dairy products are expected to decline, stocks of both butter and 
NFDM are becoming burdensome in most major producing countries. 

World sugar stocks have increased greatly as the result of a record 
sugar crop in 1976-77 that substantially outpaced consumption. 
Prospects for another record crop are indicated for 1977-78, with pro- 
duction increases in Brazil, Cuba, France, and the U.S.S.K. The Philip- 
pines and the United States reduced planted area as well as the out- 
turn. Thus, the near-term outlook is for world raw sugar prices to re- 
main at relatively low levels, although prices could strengthen over 
the long term. 

The U.N. Sugar Conference, in which the United States was a par- 
ticipant, adopted on October 7 on an ad referendum basis, a new In- 
ternational Sugar Agreement which will rely on a combination of 
export quotas and stock accumulation and release of stocks to defend 
a price range of 11 to 21 cents per pound. The agreement, which is 
planned to go into force provisionally on January 1, 1978, aims at 
holding intervention to a minimum when prices are around the middle 
of the agreed price range. 

Current prospects for an increase in world coffee supplies in 1977-78, 
coupled with a decline in net import demand, should lead to some 
further decline in coffee prices. Present prices for green coffee of $1.65 
to $1.80 a pound, New York, compare with record highs in excess of 
$3.30 in April. Under the new International Coffee Agreement of 1976, 
of which the United States is a member, export quotas are the main 
instrument for stabilizing prices when supplies are in surplus. World 
prices are likely to remain above export quota trigger levels for at 
least another year or more, unless the ICO Council revises present 
price provisions of the agreement. 

A modest rise in world demand for cotton in 1977-78 is not expected 
to offset a 10-percent increase in world cotton output of 63.7 million 
bales (480 pounds), so that world stocks should rebuild following 2 
successive years of large drawdowns. Cotton acreage may be up about 
6 percent, reflecting the response to strong prices early in 1977 by 
Northern Hemisphere producers ; Southern Hemisphere producers may 
not increase acreage because prices had declined by their later plant- 
ing time. Cotton prices have become more competitive with manmade 
fiber prices, which could stimulate cotton consumption in the textile 
market which continued depressed in early 1977-78. 

U.S. SCENE 

We have been discussing the world food and agricultural outlook. 
Now lot's look at matters at home. The U.S. agricultural plant is huge. 
This Nation accounts for about a fifth of the globe's food production. 
We produce a seventh of all the wheat, a fifth of the cotton, a fourth 
of the feedgrains and well over 40 percent of the soybeans. Keep in 
mind that only 5 percent of the world's population resides in the 
United States. 

When we look at world trade we see that U.S. exports dominate 
many world markets. U.S. wheat exports this year will account for 
about 40 percent of the world wheat trade. U.S. feedgrain exports will 



75 



run about 60 percent of the total, while U.S. soybean exports capture 
about half of world exports. The U.S. share of the world's cotton trade 
is about 25 percent. 

The world food and agriculture picture has changed during the past 
couple of years — crop production has been large and there has been a 
substantial rebuilding of stocks. This, too, has been the U.S. pattern. 
Farm output this season is up more than 3 percent from last year and 
over a 10th from 1974. Output gains reflect expanded acreage, higher 
yields and an upswing in slaughter of meat animals, dairy products, 
and poultry and eggs. If weather patterns are favorable U.S. farm 
output will continue large in 1978. Production of livestock products 
will likely remain large as relatively low feed costs help encourage 
expanded production of fed beef, pork, pouhVy, and milk. Crop output 
in 1978, however, is difficult to forecast at this early stage. Weather, 
of course, is always a dominant feature in the crop picture. Price 
expectations and relationships among crops as well as Government 
programs are also important. Subsoil moisture has been plentiful in 
the Midwest this fall and unless weather patterns turn unfavorable, 
crop output should continue large in 1978. 

Expanded farm output this year has brought depressed farm prices. 
Prices received by farmers will run about 1 or 5 percent lower. De- 
pressed crop prices account for most of this decline. Next year, if 
export markets hold up, even with continued large crop output and 
some gain in livestock production, farm prices should hold near 1977 
levels — expected lower average crop prices may be nearly offset by 
higher prices for livestock and products. 

Let's look at some of the major commodity developments for 1978 : 

Crop production is indicated record large in 1977. Timely rains 
this summer in the Corn Belt offset poor subsoil moisture conditions 
during the early growing season. However, field crops were hard hit 
by drought in the Southeast. But even though yields were mediocre in 
some areas, large crops are indicated for grains, oilseeds, and cotton. 

The feed grain crop is a record in 1977 — 201 million metric tons, or 
5 percent above 1976. The corn crop is breaking a record for the third 
year in a row. Although domestic use and exports o,f feed grains have 
been relatively large in recent years, production has gone up faster 
and stocks have mounted, especially the past two seasons. 

Wheat acreage in 1978 may drop about 15 percent because of the 
20-percent set-aside on 1978 crop wheat. The smaller cut-in acreage 
reflects the fact that some growers will not participate in the pro- 
gram. But in view of the good moisture conditions and barring un- 
favorable weather developments, the crop next year probably will be 
down considerably less than the reduction in acreage — perhaps around 
half the set- aside acreage reduction. 

Deficiency pavments to wheat growers will become an ever more 
important factor in 1978. They will be based on a percentage of 1978 
plantings for harvest and the farm program yield. 

Hefty crops and big carryovers from 1976-77 pushed grain prices 
down early in the season. However, recent indications of stronger 
export markets mainly from expected U.S.S.R. buying coupled with 
higher 1977 loan rates and increased loan activity have given some 
modest support, to prices. The grain reserve program could lend some 
further strength as the season progresses. 

98-723—77 6 



76 



CORN PRICES 




74/76 78/77 
YEAR BEGINNING OCTOBER 



SOYBEAN MEAL PRICES, 
44% PROTEIN, DECATUR 

» PER TON 




1972 73 1973/74 1974,75 1975/76 1976/77 
YEAR BEGINNING OCTOBER 1 



Attractive grain and protein meal prices are encouraging livestock 
and poultry producers to step up output. Producers are moving cattle 
into feedlots. .farrowing more sows, placing more broiler chicks and 
layers, and feeding more concentrates to dairy cows. 

Pork production was up sharply in the first half of 1977, but the 
severe winter and disease problems limited second half output. Pro- 
duction gains are likely to accelerate next year by as much as a 10th 
due to better feeding margins. 

Cattle placed on feed in 23 States were up 14 percent this summer. 
Placements should continue large in 1978 boosting fed beef production. 
However, a cutback in slaughter of nonfed cattle will keep total beef 
output under a year ago throughout 1978. 

Broiler chick placements indicate 3 to 5 percent larger marketings 
this fall : continue expansion is likely in 197S — running perhaps 5 per- 
cent above 1977. Production of milk and eggs is also expected to total 
above a year ago through mid-1978 — milk by 2 to 3 percent and eggs 
by 1 to 2 percent. 

Despite pressure .from large supplies, overall livestock prices this 
fall are likely to run 5 to 10 percent above the depressed October- 
December 1970 level. Prices of hogs will decline from summer levels 
with large output, continue above last fall. Broiler and egg prices 
have strengthened some but large supplies in coming months will keep 
prices below last fall. Fed cattle price may average in the low forties 
this winter before rising seasonally next spring. Further price rises 
are expected in late 1978. 

Milk prices may run moderatelv above a year ago in first half 1978 
because of higher supports. With increasing output, more milk has 
been moving into manufactured products. As a result. "TSDA pur- 
chases of dairy products under the price support program have in- 
creased substantially and Government-held stocks are building. 

Volume of the 7 major processing vegetables this year is up 18 
percent, with the biggest gains in tomatoes and sweet cprn. Wholesale 
prices for canned vegetables lose steadily in the spring and summer. 
With heavier new crop supplies, canned vegetable prices may run 
about the same or only a little higher than a year earlier well into 
next year, Supplies are tighter for frozen products. Stocks of frozen 
vegetables are 1 percent smaller than a year earlier. Wholesale frozen 
vegetables' prices moved up during the summer, and prices will re- 
run in well above a vear earlier. 



77 



PRODUCTION OF LIVESTOCK 
AND LIVESTOCK PRODUCTS 




BIL LBS. 

60 r— 



- TOTAL MEAT* 



BIL LBS. 



PORK / 



BIL LBS. 

30 r- 



J 1 L 



J I 



BEEF 




J I I I I I I 



1972 74 76 78 80 1972 74 76 

* INCLUDES BEEF. VEAL. LAMB AND MUTTON. PORK. POULTRY MEAT. 
USDA/ERS 



NOVEMBER I977 



With another large crop of fall potatoes in prospect — only 1 per- 
cent below the 1976 record — grower prices will remain low and close 
to the year earlier average. With export demand slackening, and only 
moderate processing activity, markets lack the brisk pace of last year. 



POTATOES : U.S. GROWER PRICES 




JUL OCT JflN APR JUL OCT JflN RPR JUL OCT 

1975 1976 1977 



TOMATOES : U.S. GROWER PRICES 




JflN RPR JUL OCT JflN 

1975 



JUL OCT JflN 

1976 



78 



The first citrus crop forecast of the 1977-78 season was down 6 
percent from last year's record and 2 percent below 1975-76. The 
orange crop will be down 9 percent, but Florida's early and midseason 
crops — big juice producers — will be down 23 percent. While juice 
yields will be up, and a larger pack is in prospect, low carrying stocks 
will pull down total supplies. This together with strong demand will 
keep frozen concentrated orange juice prices at high levels. 

The 1977-78 pack of most processed noncitrus fruit is expected to 
be up. However, supplies are still likely to be near last year's level 
because of smaller carry-in stocks. Supplies of dried and frozen fruit 
could be slightly above a year ago. Demand is likely to be good here 
and abroad with prices of most items expected to remain firm. 

The outlook for the 1977-78 cotton season features a larger U.S. 
carryover next summer. Disappearance may change little as larger 
U.S. mill use may about offset smaller prospective exports. The quan- 
tity of cotton produced in this country next year will depend on the 
price of cotton relative to competitive crops such as soybeans and 
grain, sorghum, plus weather and program provisions. Prices for both 
cotton and competing crops have declined in recent past months with 
cotton experiencing the sharpest drop. Current price relationships be- 
tween cotton and competing crops would indicate 10 to 20 percent 
fewer acres of cotton in 1978. 

FARM INCOME 

Farm income prospects deteriorated sharply this past summer as 
rapidly falling crop prices took their toll on cash receipts. While 
prices have generally strengthened recently from their harvest lows, 
crop receipts from marketings in all of 19? 7 could be the lowest since 
1973. However, higher CCC loan rates under the new legislation are 
expected to produce greater use of the loan programs and limit further 
price declines. Total crop receipts for 1977 are expected to total near 
the 1976 level of over $47 billion. Receipts from net loan activity 
could run as much as $4 to $5 billion above last year's $1 billion. 

Lower feed costs are having their effect on the livestock sector. 
Feeder animal prices are being bid up, placements of cattle on feed 
are increasing, and farrowing intentions are up sharply. Recent drops 
in feed prices have given rise to the most favorable feeding margins 
in years. The impacts of these developments will be reflected in both 
livestock producers' incomes and retail food prices later this year and 
in 1978. 

For the current year we expect only moderate gains in livestock and 
livestock product receipts. With prospective volume up slightly, over- 
all livestock prices will probably average near last year's levels. 

Overall cash receipts for 1977 should total roughly near $94 billion 
for 1976, with the changes in crop and livestock receipts about off- 
setting. 

The new farm program will improve the income outlook through 
increased direct Government payments. These should rise from less 
than $1 billion for the last several years to about $2 billion in 1977. 

Beyond increasing deficiency payments in 1977, the new legislation 
is boosting this year's cash incomes through higher loans and supports 
to sugar growers. 



79 



Taking these factors into consideration, total realized gross income 
for 1977 is expected to be up from last year. The overall increase in 
production expenses this year has moderated due to smaller increases 
in costs of production items (especially feed), interest, taxes, and 
wages. With only modest increases in production expenses, net farm 
income should remain near the $20 billion level in 1977. However, in 
constant dollars this could be the lowest level of net incomes since the 
earlv thirties. 



REALIZED NET FARM INCOME 
$ Bi 




BALANCE SHEET OF THE FARMING SECTOR 









Auau / 

v, 








// 

/ 1 
/ / 








j i 




\ 


Proprietors' equities 

TYrrrvTTT 





1940 1950 ' I960 1970 1980 



WC EOS S717 77(111 



But net farm income doesmt tell the whole story. There are at least 
two other key factors to consider when attempting to measure the eco- 
nomic well-being of farmers. One is that many farmers earn a con- 
siderable portion of their income from nonfarm sources. Historically, 
the total farm population — when small farms are included — has been 
earning about as much from nonfarm sources as from their farming 
operations. In 1977, income from nonfarm sources accounted for 55 to 
60 percent of the average income of farm families. Of course, the 
smallest producers tend to earn the largest share of their incomes off 
the farm. 

Income alone does not tell the whole story of the status of U.S. agri- 
culture. One needs to also consider the farming sectors capital posi- 
tion has to be analyzed — its asset and debt structure. Here we find 
that, although farmers' current income positions may be under stress 
temporarily, many farmowners are well off in terms of net worth. By 
the end of 1977, the value of farm assets is expected to total $730 bil- 
lion, a gain of $59 billion for the year. The farm debt is forecast to 
total $119 billion, leaving a net worth of $611 billion, an increase of 
813 billion for the year. 

As usual, the big mover in farm assets is real estate. Its value is 
expected to total $547 billion this year, and account for three-fourths 
the value of all farm assets. Despite heavy pressure on farm prices 
this year, farmland values are still rising, although reportedly at re- 
duced rates and even declining in scattered areas. 

The value of other farm assets advanced in 1977. By January 1, 1978, 
the value of livestock on farms will be about 7 percent larger than 1 
year ago due mostly to improvements in cattle prices. Machinery and 
motor vehicle values will be up about 4 percent, mainly reflecting 
higher unit values. The buildup in grain stocks will also help push 
the asset values up despite lower prices for some commodities. 



80 



Farmers' financial assets are expected to post a modest gain of about 
5 percent in 1977, but most of the increase will be in rather nonliquid 
investments. 

The farm debt is estimated to increase about 15 percent in 1977. A 
sharper than usual rise in farm real estate debt will be due in large 
part to more borrowers turning to refinancing burdensome short-term 
indebtedness into longer term real estate secured loans. 

Attempting to estimate farm income levels for 1978 is extremely 
hazardous at this early stage. Although crop prices should increase 
seasonally in the first half of 1978, large carryover stocks will be limit- 
ing factors; More importantly, prospects for the 1978 crops will domi- 
nate income flows to producers in the second half of 1978. The new 
farm program will have an even greater impact on incomes to pro- 
ducers in 1978. In addition to the likelihood of large deficiency pay- 
ments to wheat producers, there will probably also be payments to 
feed-grain producers in the coming year. In addition, the net income 
of livestock producers should improve as the new year unfolds. How- 
ever, production expenses will continue to rise and likely offset any 
improvement in current dollar net incomes. 

Despite lower net farm incomes this year, traditional lenders were 
willing to finance all but a few farm customers. Although some banks 
in scattered localities — primarily in cattle and wheat areas — were hard 
pressed to come up with sufficient loan funds, in most cases farm 
borrowers were well served. The average farm debt-to-asset ratio while 
rising in 1977 is still 16 percent and has changed little since the mid- 
sixties. Experienced lenders are aware of farmers' equity position. 
Current indications are that lending institutions intend to continue 
serving the farm sector, even though the price-cost problems exist. 

FOOD AXD MARKETING 

Despite record large farm output and generally lower prices to U.S. 
farmers, food prices in grocery stores for all of 1977 will average 
about 6 percent higher. Higher prices for fish and imported foods, 
especially coffee, account for about three-fifths of this increase. The 
remainder is due to higher costs of processing, marketing, and dis- 
tributing food. Prices for restaurant meals and snacks, which are in- 
fluenced even more heavily by cost increases after food leaves the farm 
and which also reflect higher coffee prices, will average nearly 8 
percent above last year. 

Current conditions suggest large crop harvests this fall along with 
an anticipated expansion of livestock feeding will hold the average 
prices of U.S. farm-produced foods about steady through mid-1978. If 
coffee prices continue to decline as expected, offsetting further in- 
creases for other imported foods and fish, average prices for these 
foods will also show little change. Consequently, relatively moderate 
increases in retail food prices, in the neighborhood o{ 1 percent or so 
each quarter, now appear likely through the first half of 1978. These 
expected increases primarily reflect continued upward pressure from 
processing and marketing costs. 



81 



PROCESSING AND MARKETING COSTS TAKE THE BIGGEST BITE OUT OF 
CONSUMER FOOD BUDGETS 

Inflationary pressures from rising wages of food processing and 
marketing employees and costs of various inputs used by food process- 
ing and marketing firms, are expected to continue their upward push 
on retail prices. Eecent and prospective wage agreements in food and 
allied industries, and the pending increase in the minimum wage, will 
accelerate labor costs in the food industry. In addition, higher prices 
for other goods and services, such as energy, packaging materials, and 
transportation, can also be expected to contribute to higher retail 
prices. 

In 1978, it appears that processing and marketing costs could aver- 
age 4 to 6 percent higher for the year. Increases will vary among 
products, with cost pressures greater for highly manufactured foods 
than for more perishable products such as meats, fresh fruits, and 
vegetables which are more responsible to change in farm gate prices. 



LABOR NOW LARGEST COMPONENT OF CONSUMER FOOD EXPENDITURES 

Consumers will likely spend around $180 billion for U.S. farm foods 
this year, up from around $136 billion in 1973. Nearly 90 percent of 
this rise will result from increased marketing costs. As a matter of 
fact, since 1974, the farm value of these farm-produced foods has held 
fairly steady, while processing and marketing continue to push up- 
ward. Over 40 percent of the rise in food expenditures since 1973 has 
been due to increased labor costs. 



U.S. FARM FOODS 



$ BIL 
200 



150 



CONSUMER 
EXPENDITURES 



100 - 



FARM VALUE LABOR * 



OTHER 
COMPONENTS** 



PACKAGING* TRANS- 

PORTATION 

iTTTTn rrfTTTl 



1973 

1976 



78 73 78 73 78 73 78 73 78 73 

1977/78 Foraca« * Component* of total marketing b* 

h com m utidaa. fuai. promotion, local for-hm* transportation, maurano*. corporal* profrta 



78 



82 



In 1977, labor costs involved in processing and marketing food will 
probably become the largest single component of consumer food ex- 
penditures, taking almost a third of the consumer's food dollar. Look 
for labor costs to exceed the value farmers receive for producing for 
the first time. Labor costs could top $58 billion this year, while the 
farm value may hold at about $56 billion. 

1977 FOOD CONSUMPTION SLIGHTLY BELOW 1976 RECORD 

Per capita food use, which hit a record in 1976, may be down slightly 
this year — perhaps about one-half percent — but still the second high- 
est in history. The modest drop will be largely due to a slight decline 
in crop foods. Per capita use of livestock foods likely will hold about 
steady with last year's record. 

Among the crop foods, consumption will be down for coffee, fruits, 
and fresh vegetables. These declines reflect short supplies and higher 
prices earlier this year. Consumption of most other crop foods will 
hold about even with last year. 

Consumption of livestock foods reflects larger supplies of pork and 
poultry, which will about offset lower consumption of beef, fish, and 
eggs. Per capita use of dairy products likely will be about the same 
as last year. 



U.S. AGRICULTUKAL TRADE 

(By Thomas R. Saylor, Associate Administrator, Foreign Agricultural Service 

USDA) 



Your earlier speakers, in discussing the substantial world grain 
crop and economic growth prospects, provided the setting for what 
I have to say about the outlook for U.S. agricultural trade. 

Let me begin by saying that there probably are more uncertainties 
involved in trade forecasting at this time than ever before — and that 
is saying quite a lot, given the nature of trade in the seventies. 

In such a context, the capabilities of the Foreign Agricultural Serv- 
ice to provide timely and adequate forecasting become even more 
important. 

While I am new to the Foreign Agricultural Service myself, I have 
in another capacity, observed the reporting and analysis which has 
been coming out of that agency for several years. Frequently in the 
face of strong rumor and public opinion, we are pressed to adjust 
our forecast. I am pleased that despite significant pressures, our 
analysis stood firm in their positions on the soybean and coffee mar- 
kets earlier this year. FAS has maintained and will continue to main- 
tain a policy of basing forecast on solid analyses. "We will attempt 
to build upon our existing base of resources to strengthen our fore- 
casting capability. 

We hope to develop new tools such as LACIE, which can supple- 
ment those resources, and we will seek to make better use of existing 
tools such as our network of attaches, bilateral information exchanges, 
and, wherever needed, seeking to have specialists visit foreign produc- 
ing areas to make assessments on the ground during critical periods 
of the crop season. Only in such a way can we establish and maintain 
a sense of trust in our analytical and reporting services. 

Within the uncertainties I mentioned, the Department of Agricul- 
ture is predicting an increase of close to 10 percent in the volume of 
agricultural exports in fiscal year 1978 to just short of 110 million 
metric tons. That would be a new record, and that is the good news. 
Unfortunately, export prices averaging around 15 percent below 
those of last year will more than offset the volume increase, so we 
look for a 1978 export value of about $22 billion — $2 billion below 
the record $24 billion of fiscal 1977. 

That was the bad news, but I think the growing world demand for 
food and the growing interdependence among countries cited by 
Dawson Ahalt can make bad export news a short-term proposition if 
we take advantage of what we have learned during the years of un- 
precedented agricultural export growth. 

I want to talk about that later, but first T should summarize the 
prospects for the current fiscal year. As I said, we expect exports of 

(83) 



84 



$22 billion. At the same time. U.S. agricultural imports are forecast to 
total about $13.5 billion, marginally above the record imports of last 
year. What it adds up to is the prospect of a decline in the U.S. agri- 
cultural trade surplus of about $2 billion from last year's $10.5 billion. 

Grain exports and those of soybeans are expected to increase in 
volume by about 10 percent. Cotton exports look to be down somewhat 
in both volume and value, along with shipments of animal fats and 
vegetable oils. 

Among the major markets, we expect U.S. exports to Western Eu- 
rope to decline, perhaps by as much as 15 percent. Good harvests there 
will result in reduced imports of U.S. feed grains and potatoes. How- 
ever, a higher grain/oilseed price ratio should stimulate increased 
shipments of soybeans and meal to this region, and harvest damage to 
European wheat quality should bring slightly larger imports of U.S. 
high-quality wheat. 

Although we expect increases in volume of both feed grains and 
soybeans and meal to Japan, lower prices for these commodities are 
expected to cause a decline in value of our exports to Japan of close 
to 15 percent. Wheat exports to Japan may increase marginally, and 
increases are forecast for fruits and animal products. 

U.S. agricultural exports to Canada, North Africa, and West Asia 
are expected to rise, and a sharp gain is forecast in exports to the 
Soviet Union — from $1.1 billion in fiscal 1977 to $1.6 billion in the cur- 
rent year. U.S. exports to Eastern Europe are expected to rise by about 
$120 million to $1.1 billion. 

I should also mention the People's Eepublic of China (PEC), where 
this fiscal year will see the first significant U.S. farm exports since 
1975. The PEC already has bought U.S. cotton and soybean oil for 
delivery during the year and some added purchases of U.S. products 
seem likely. 

U.S. agricultural exports to East and Southeast Asia are expected 
to continue their strong growth of recent years. Volume increases are 
expected in wheat, feed grains, soybeans, tobacco and cotton, although 
total value probably will be little different from the $2.47 billion of 
last year. 

The outlook for the major commodities : The U.S. grain and feeds 
export forecast for the year is $9.8 billion, off 4 percent from last }'ear. 
riii- includes prospects for substantially higher imports by the 
U.S.S.E. However, to reach the projected level of imports which is 
currently estimated at 20-25 million tons from all sources, a substan- 
tial piekttp in the rate of actual shipments to the U.S.S.E. will be re- 
quired in the coming months. West European coarse grain imports 
from all sources will likely decline from last year's level, although 
the extent of livestock feeding could moderate the expected decline. 

Eight now, we are forecasting feed grain exports of 50.4 million tons 
valued at $4.8 billion. That would be near last year's volume but down 
3omewhat in value. It looks like wheat exports will rise by about 20 
percent in volume. This will be enough to offset the lower price and 
bring the value of wheat and flour exports to $3.1 billion, slightly more 
than last year. 

We look for a decline of 22 percent in export value of oil seeds and 
products to $6 billion, despite a significant increase in export volume 
of soybeans and meal. 



85 



Livestock and livestock products exports, which last year hit a new 
record and exceeded imports of these products for the first time, will 
decline slightly this year to about $2 billion. Within this category, we 
expect beef exports to increase and pork exports to decline. There 
should be a slight rise in poultry exports, and dairy products 
shipments may rise slightly. 

Some decline is anticipated for cotton and for tobacco, both in vol- 
ume and value, while exports of fruits and vegetables are expected to 
continue to rise, thanks in large part to poor fruit crops in Europe. 

What it all adds up to is that for the first time in 8 years. U.S. agri- 
cultural exports are not expected to show a value increase. 

Despite the prospect of a slight decline, we still are expecting U.S. 
agricultural exports of more than $20 billion for the 5th straight year. 
And to put this figure into a longer term perspective I should remind 
you that this is a level over three times greater than the average of the 
sixties. 

Most of us are familiar with the history of that dramatic growth, : 
Rising world income, crop shortfalls, devaluation, and other factors 
that triggered an upsurge in export demand to which U.S. farmers 
responded quickly. 

There is more to the story, however — an aspect we tend to overlook. 
It is that the sharp growth in the seventies came from a solid foreign- 
marketing base laid in the fifties. There was market development work, 
begun in the fifties; there was a shift toward export marketing in U.S. 
farm program pricing policies; there were major trade negotiations, 
including the achievement of a zero-duty binding on soybeans to the 
European Community, and there was the growth of U.S. agriculture's 
reputation as a dependable supplier. 

Those elements remain largely intact as we stand on what appears 
to be a plateau in export growth. The question as we move into the 
final 2 years of the hectic seventies is how best to use these resources to 
build for new growth under new conditions. 

Things have changed in international agricultural trade since the 
sixties. Competition has increased, particularly in oilseeds. The Euro- 
pean Community continues as our traditional and most important mar- 
ket, but its relative importance has declined as other markets have 
emerged. While U.S. agricultural exports to the Community were 
going up by 2.7 times from 1970-72 to 1976, to $6.4 billion, exports to 
the rest of the world went up even faster — by 3.3 times, to $15.8 
billion. 

J apan, for example, crossed the $1 billion mark as a U.S. agricultural 
customer in 1970, and last year bought more than $3.5 billion worth 
as our most important single country market. West Germany and the 
Netherlands, traditionally near the top. were second and third last 
year, but the fourth largest market was the Soviet Union, an indica- 
tion of the increasing role played by the centrally planned economies 
in U.S. agricultural export trade. 

Between 1970 and 1976 the share of U.S. agricultural trade repre- 
sented by these nations grew from 2.5 to 10.5 percent, on a value basis. 

The value of U.S. exports to the developing countries has grown by 
about three times since 1970, but the most significant thing about these 
shipments is the change in the mix from concessional to commercial 
sales. 



86 



Export commodity components also have been changing. Growth 
has been most rapid for feed grains and soybeans — products that sup- 
port the production of livestock products. There have been notable 
gains in fresh fruits and other higher cost food items. But the center 
of this growth has been shifting from Western Europe to Japan, and, 
for feed grains, to the U.S.S.R., Eastern Europe, and, to some extent, 
to the higher income developing countries such as South Korea and 
the Republic of China on Taiwan. 

Wheat trade patterns also are changing. Wheat trade to the devel- 
oped countries has grown little in the seventies, but the demand for 
wheat in the developing world is growing. Since 1974, more than one- 
half of world wheat imports have been by developing countries, and 
recent studies project their food grain import needs to be possiblv 
double the 30 to 45 million tons of 1970-75 by 1985. 

The People's Republic of China also appears to be emerging as a 
regular buyer of large amounts of wheat. You will recall that we sold 
the Chinese 5.1 million tons of wheat in 1972-74. Then they quit buying 
from us, but not from others. It is expected that they will import at 
least 9 million metric tons this year — from Canada, Australia, and 
Argentina. 

What all this suggests to me is that U.S. export strategies for the 
future must be based on where we can sell a commodity as well as how 
we can sell it. It suggests that economic development programs in 
poorer countries can be as important as sales promotion campaigns 
among the prosperous, that credit facilities and most favored nation 
treatment can be as potent as the shrewdest trade negotiator in laying 
the base for solid, sustained growth in U.S. agricultural exports. 

It suggests a total approach to U.S. market development that takes 
account of the three distinct markets that have emerged during the 
hectic period of the seventies. There are the developing countries, in 
which poverty keeps the lid on effective demand from a huge and ris- 
ing reservoir of food needs. Then there are the centrally planned econ- 
omies, where States have decreed more meat, milk and eggs for the 
people, but foreign exchange and weather are the keys to how fast and 
how far the increases will go. Finallv, there are the developing coun- 
tries, where import barriers imposed largelv to support domestic agri- 
cultural programs serve to restrain the demand for higher priced 
foods resulting from the economic growth of the sixties and the early 
sevonties. 

The task of export expansion is to put together an approach adapted 
to eaoh of those markets and to do so with the objective of tapping 
tho demonstrated long-term potential in each. 

Perhnps it seemed appropriate for the times, but T think the United 
Stntos in the past has fornsod too haT'd on immediate problems in 
agricultural trade — tho ad hoe "quick fixes" that spawned embargoes, 
trade wars, and other aberrations from which nobody' gained. In this 
reo/ard. the problems of steel, shoos, and TV sots are. in part, the prob- 
lems of American agriculture, for tho moans by which tho problems 
are resolved have profound implications for our own ability to keep 
export channels open and to seek expanded markets. 

TTo wo vor, our focus should bo on tho very ovidont future growth 
of world demand for agricultural products and on insuring our share 
of that growth. 



87 



I do not think it is an overstatement to suggest that we have reached 
a watershed in U.S. trade policy. The sluggish world economy as well 
as long-term structured developments in that economy have given rise 
to a new pattern of protectionism. And in such a context, we must be 
cautious that the policies we take do not contribute to the weakening 
of the GATT framework within which world trade has expanded 
over the past several decades. 

It is easy to find actions on the part of other countries to expand 
their trade position in contravention of established trade rules. We 
must resist the tendency to emulate such actions both for the interest 
of our own economy and the expansion of world trade. Otherwise we 
may contribute to a snowballing effect where the structure, imperfect 
as it may be, for the orderly expansion of trade is replaced by efforts 
of nations to maximize short-term gain regardless of the long-term 
effects. 

A good case in point is the export subsidy. Through sustained ef- 
forts, we have been able to limit its use against our own exports to 
third markets. But in periods of oversupply we continue to feel do- 
mestic pressures to return to such subsidies ourselves. Yet while a sub- 
sidy might provide some cosmetic relief, we have not been able to 
develop evidence that the subsidy can be effectively used to preserve 
market share over any sustained period. Rather, the only effect we 
can be sure of is that a subsidy will result in a loss of income on the 
part of all producing countries. 

I think it would also be appropriate at this point to discuss the 
question of bilateral trade agreements. The Soviet grains agreement 
has been useful in regularizing our grain trade with the U.S.S.R. 
and in providing an avenue of communication with the Soviet Union 
on their import requirements. However, we should recognize that 
even in the area of information-sharing gains are going to be of an 
incremental nature. We feel that the Soviets understand that improved 
sharing of information is as important to them as it is to us. I believe 
they recognize that extremely disruptive buying patterns could lead 
to further restrictions on their access to our markets. But I would 
also hope that this agreement, which was shaped in a time of tight 
supply, does not become a restriction, in itself, on regular and ex- 
panded trade with the Soviet Union. 

The case of the Soviet Union is somewhat exceptional. It is one of 
an open system selling to a closed system and a system which accounts 
for the major share of variability in world grain trade. I do not, how- 
ever, see bilateral trade agreements and greater structuring of world 
trade replacing the basic principles of trade which have guided its 
expansion over the past 40 years. 

We have entered into informal agreements with a few other coun- 
tries but more structured agreements would not be in the interest of our 
own export trade over the longer term. To structure that pattern of 
world trade, in our view would not only inhibit agricultural adjust- 
ment which might be in our interest but would contribute to greater 
instability of world markets. 

The race for supply/purchase agreements can be expected to be 
limited by the size of the market in an average year. That means there 
will be a residual market which is subject to accentuated supply and 



88 



demand pressures. We feel, therefore, that to encourage the modifica- 
tion of such agreements to structure trade is a risky strategy and one 
which would undermine the basis upon which we have enjoyed greatly 
expanded trade through our comparative advantage. 

The Department has launched a course of action to implement this 
policy of stable, sustainable growth in agricultural exports through 
its market development programs and international negotiations. 

As in the case of market development in general, trade negotiations 
require long-term strategies. We must look to realistic growth poten- 
tial before spending negotiating chips. 

The economic climate for the current round of trade negotiations is 
not very favorable, but the negotiations must show progress in the 
rationalization of trade. The alternative is an acceleration of the cur- 
rent tendency to try to solve short-term economic stress and chronic 
productivity problems with trade restraints. 

We have tabled a tariff plan for industrial goods — a tariff formula 
that i c intended to be indicative for reductions in agriculture. We have 
tallied our trade requests of other countries. Proposed codes on subsi- 
dies and other trading mechanisms are to be tabled December 15, and 
offers in response to requests are to go down January 15. Then the 
hard negotiating can begin. 

As to our objectives in the MTN, a top priority, certainty, is to pre- 
serve our existing rights in the major markets. 

And we will continue to press hard for improved access to markets. 
But we will do so more selectively, in the context of market potential 
as well as current buying power, and in terms of what is possible as 
well as what is desirable. Each chip shoved on the table will be weighed 
for its contribution to the primary objective of enhancing the long- 
term global opportunities for stable, sustained U.S. agricultural ex- 
port growth. 

As, one aspect of the search for this objective, the United States is 
participating in discussions regarding the negotiations of an agree- 
ment to replace the current International Wheat Agreement. In Octo- 
ber, the United States tabled a specific proposal which would provide 
for greater security of world food supplies, moderation of extreme 
price fluctuations, the expansion of international trade in wheat, and 
assured food aid to developing countries. 

While a general consensus seems to be emerging among participat- 
ing countries along the lines of the U.S. proposal, there continue to be 
some differences of view as to how the stabilization of wheat prices is 
to be achieved. The next step is a meeting of the Council itself Novem- 
ber 29 to December 2 to review the work of the last two preparatory 
proup meetings. It is likely that a drafting group will meet in early 
December to revise the Secretariat's draft. Then a special council ses- 
sion may be called in early January to consider that dr>ft and decide 
whether, to convene a negotiating conference in mid-February. 

The U.S. view continues to be that an effective wheat agreement is 
needed t o reduce the wide price swings that have disrupted world mar- 
ket ^ repeatedly since 1972. 

W< i will not, however, accept an agreement which would require an 
alteration of our marketing system. We will not accept a pricing sys- 
tem which would make our grains less competiti ve in the world mar- 



89 



ket. In other words, any wheat agreement that we become a party to 
must permit our markets to function — so that efficient producers have 
an opportunity to compete in a world market not bound within rigid 
price limits. 

The United States took an active role in negotiation of the Interna- 
tional Sugar Agreement, to become provisionally effective January 1. 
We believe the agreement will contribute to long-term solution to a 
very troublesome world sugar instability. 

World demand for agricultural products is growing, and it will con- 
tinue to grow. It will grow in different ways for different commodi- 
ities, and at different rates. The challenge in export expansion is to en- 
courage the fulfillment of that demand by sustainable, stable growth 
in world trade, and to insure that U.S. agriculture gets its share. 

We must, therefore, continue to build the strongest case we can for 
the expansion of, not protection against, world trade. 

We must make better use of the resources, public and private, to 
facilitate long-term growth of markets for U.S. farm commodities, 
not just for short-term cosmetic stimulation of trade. 

And we must maintain our faith in the strength of our traditional 
marketing system and the principles which have encouraged orderly 
world trade over the past half a century. 



FOOD—SUPPLIES, DEMAND, 
AND CONSUMPTION 



NATIONAL APPROACH TO CARCINOGENS 



(By David W. Huston for Hon. Barbara Hackman Franklin. Commissioner, 
Consumer Product Safety Commission) 



Several weeks ago at a press conference in Harr-isburg, Pa.. I called 
for White House leadership in the development and articulation of a 
national, coordinated effort toward control of possible cancer-causing 
substances, only one example being Tris, with which I am sure you are 
familiar. I said at that time that what is needed is open and frank dis- 
cussion of the causes and control of cancer, the second leading cause of 
death in the United States, the subject of growing governmental atten- 
tion, and a source of great concern to the public and to those in business 
who face decisions about the manufacture and marketability of many 
chemical compounds in a variety of applications. 

The consternation of the American people is understandable. Is 
nothing safe any more ? Are we victims, they ask, of overdramatization 
by the media? Regulatory overkill? Industrial conspiracies? Is this a 
necessary price we pay for living in a highly industrialized society ? 
Or, are the dangers all too real and avoidable ? 

The stark reality, of course, in trying to answer these questions in any 
final way is that we find ourselves not knowing with certainty all the 
causes of cancer. And trying to find out is difficult, agonizing and can 
take years. 

What we do know, however, is this : Advances in the basic scientific 
state of the art clearly indicate that nothing more surely will guarantee 
wrong answers in this area than neglect or complacency. In other 
words, we know enough to know that closer focus on carcinogenicity 
is not misdirected. In fact, we can expect more certainty as science be- 
comes increasingly capable of identifying hazards where none were 
thought to exist before. 

But Federal involvement spans many agencies — each with its own 
laws, priorities and budgetary limitations. What then constitutes ade- 
quate public protection ? Are the answers to be found more in terms of 
the efforts of the individual agencies or the Federal response as a 
whole ? Is attention to many chemical hazards required or a more de- 
tailed focus on a few ? 

There are other questions. Is there need for greater consistency on the 
ways agencies move from research results to regulation — or will this 
always boil down to decisions on a case-by-case basis within the param- 
eters of each agency's laws? How do we minimize delay in the regula- 
tory process yet assure an ethically and legally defensible basis for reg- 
ulation, meaningful public participation and adequate due process? 
Do we scrap cost/benefit thinking altogether as some have suggested? 
Or do agencies have the obligation to assure that decisions do not go 

(93) 



94 



beyond the point when regulation — or reluctance to act — may be self- 
clef eating ? 

As a Nation, we need to better identify tests that are reliable, fast 
and cheap to screen substances for carcinogenicity. Some short-term 
testing is being used but no one in or out of Government is sure just yet 
how conclusive a predictor it is or should be as a basis for regulation. 
And, animal tests to determine carcinogenicity can take years and cost 
up to $250,000 each. At the moment, each agency has or is formulating 
its own testing guidelines and criteria. So presumably are many com- 
panies. 

One result is that as companies try to evaluate new chemicals on the 
theory that safety should be tested in the lab and not in the environ- 
ment! — they find no uniform Federal or scientific position on what tests 
should be conducted and how the results should be interpreted. 

The latest example of the problems we face with the testing of toxic 
substances surfaced recently with Fyrol. The CPSC held a public 
meeting with consumer interests, representatives from private indus- 
try, and scientists in the testing field to discuss testing methods and re- 
sults regarding the flame retardant, Fyrol FR-2, which has been used 
in some cases as a substitute for Tris in children's sleepwear. One con- 
sumer group advocated that garments treated with Fyrol be recalled 
from the marketplace based on a series of short-term tests done by 
several laboratories while those in the industry who manufacture Fyrol 
or clothing treated with the chemical claim that their tests, performed 
separately, and using different methods, did not indicate that a poten- 
tial hazard exists. These kinds of discrepencies in testing methods and 
results make it difficult for regulators to know which chemicals may 
pose potential hazards to the public. Make no mistake, Fyrol and Tris 
are only two in a long list of chemicals that the Commission will be in- 
vestigating in the future. And, I am certain that flame retardants will 
not be the only textile chemicals subjected to this kind of scrutiny. 

Therefore all of us in Government, in the private sector, and the 
general public must get our act together in terms of how suspected 
mutagens or carcinogens are to be tested and regulated in the future. 

Can or should differences in testing be resoh^ed? In my opinion, 
agreement at least with respect to a battery of short-term tests to be 
run, standardizing the test methodologies and what that test results 
mean is crucial. Critical also is a uniform definition of "carcinogen-' 
and the standardizing methodologies for conducting the longer term 
tests. Adjustments, of course, should be made from time to time to stay 
in tune with developing scientific knowledge. Then there's the issue of 
threshold levels — whether or not regulatory agencies can determine 
levels below which carcinogenic compounds have no adverse effects 
on humans. If we knew for certain what these levels are for the com- 
pounds — or even if they exist, making decisions would be easier. But 
again certainty does not exist, forcing regulators to act on the basis 
of the best information available and in keeping with the laws they 
administer. 

Recent efforts to deal with this problem were headlined when the 
Food and Drug Administration proposed a ban on saccharin in ac- 
cordance with their Delaney clause, which triggers an automatic ban. 
The laws administered by CPSC, on the other hand, do not contain a 



95 



Delaney-type provision. At our agency, regulation must follow a 
Commission decision that a substance presents an "unreasonable risk" 
of injury, illness or death. Still other agencies have a different 
approach. 

In light of the important public policies inherent in this whole issue, 
the most compelling need, as I see it, is to sharpen, broaden and unify 
the focus on carcinogens — to pull our act together, expand the cast 
and shift the spotlight onto arriving at some better answers. 

We need more and better scientific information, yes. We need intelli- 
gent and informed agency-by-agency action, yes. We need continued 
close cooperation among the agencies, yes. But we also must move 
beyond this. 

What is needed is a strong, sustained and coordinated national com- 
mitment and a plan of action to find better ways to bring the hazards 
down to size. 

With strong leadership and support from the White House, candid 
dialogue should begin with the scientific, academic and medical com- 
munities, the private sector, the public and others. Together, we need 
to develop a coordinated approach and strategies which balance the 
need for more consistency in Government policy with the need for 
flexibility for agencies to perform the jobs that Congress and the 
President intend. 

If we don't move in this direction, I fear we run a great risk of un- 
even and unfair regulation that seriously shortchanges the public. 

The point I am making should not be misunderstood. I am not at- 
tacking ail forms of Government regulation. Rather, what is at issue 
is that we cannot blithely continue to mandate requirements if the 
substantial costs and other adverse side-effects they produce far out- 
weigh the benefits. 

A particularly good example of this occurred last week at the Com- 
I mission. The Commission voted that it is "essential" to propose for 
the second time in 3 years extensive recordkeeping requirements that 
would affect over a million companies. 

I cast the sole dissenting vote because I believe they are a classic 
example of regulatory overkill. 

If finalized, the rules would compel over a million companies to 
| generate consumer complaint files, establish and maintain an exten- 
I sive central filing and retrieval system with records of each and every 
safety-related communication readily accessible and available. The 
records woula have to be kept for 3 years; knowing violators could 
be subject to penalties up to $500,000. 

At first glance, some may consider this regulation harmless. But 
consider this: The Commission already can and does obtain this in- 
formation simply by asking companies for it or if necessar}^, by issuing 
a special order, general order or even a subpena. Beyond this, the 
Commission made no attempt to estimate the costs for companies in 
implementing the regulation — costs which, I believe, will be passed 
on to consumers in the form of higher prices without any correspond- 
ing gain in the safety of the products they buy and use. ~No exemptions 
for small businesses have been made in the text of the Commission's 
proposal. And, to make matters worse, the fact is that the Commission 
proposed substantially the same requirements 3 years ago, with public 
comment at that time being overwhelmingly negative. 



96 



As I see it, the Commission, in proposing these requirements, has 
ignored the repeated statements of President Carter and former Presi- 
dent Ford that Government should move away from paperwork that 
smothers business people and hands consumers the bill unless there 
are good reasons. It thwarts the intent of Congress — in this case an 
intent specifically written into the language and the legislative history 
of the law CPSC administers. Congress told the Commission that we 
could "reasonably" mandate requirements only after giving "due con- 
sideration" to the costs and benefits. But most onerously, the proposal 
shortchanges the public in the name of consumer safety when, in real- 
ity, about all they will get is another blow to the family budget. 

The two issues I have outlined for you tonight provide examples 
of the daily problems a regulatory agency and regulators face in inter- 
preting the statutes that they are charged with enforcing. As I have 
outlined, the issues are complex and I am sure, will become even more 
so in the future. As a regulator and public official I look more and more 
to the public for their feelings and views on consumer product safety. 
I have recently established a new program consisting of a series of 
meetings with a large cross-section of the American public — home- 
makers, businessmen, women's groups, farmers, and elderly, consumer 
advocates — to provide me with a broad and diversified range of views 
on the crucial issues that face me as a decisionmaker. I am hopeful 
that these meetings on a regular basis will help me to make the best 
possible decisions I can. 



CONSUMER CONCERNS ABOUT ADDITIVES AND 
RESIDUES IN FOOD AND FIBER 



(By Dr. Robert Angelotti, Administrator, Food Safety and Quality Service, 

USDA) 



This session on additives and residues in food and fiber is most 
timely because consumer concern over these substances in food is in- 
tense. This subject is particularly appropriate to this outlook confer- 
ence because Secretary Bergland has repeatedly pointed out that 
USDA is the "People's Department" and as such the USDA represents 
the interests of all the people not just those of producers and processors 
who depend as heavily upon chemicals to produce the abundance and 
variety of foods we enjoy. 

Since World War II, food processing practices and capabilities 
have changed in the United States from a system that provided mostly 
raw agricultural commodities for distribution and sale to consumers 
to a system of processed, prepackaged foods for consumers. This 
change reflects consumer desires but has been achieved through adop- 
I tion of a technology in agriculture and food processing and packaging 
that is dependent upon chemicals. 

This dependence upon and use of chemicals is viewed by consumers 
as another of the many technological changes which have made life 
very complicated. Many people feel they no longer can control their 
lives and destinies. People yearn for a simpler life with less problems 
or at least with problems they can solve as individuals or family units. 
Our society is dependent upon its machines and electronic systems and 
people are frustrated because they don't understand the systems and 
lack control over them. In addition they are constantly reminded that 
the systems are imperfect and the imperfections make their lives a 
misery. 

The desire is real to go back to an earlier time when each man con- 
trolled his own life, when he grew and made the things he needed, 
when life was easy and free from uncontrollable influences. We will 
never go back because it is not in the nature of man. We will, however, 
go forward with a new awareness. An awareness that each forward 
stride must be assessed for its implications. This is where we find our- 
selves today and the Food Safety and Quality Service shall serve as 
the focal point in the USDA for this new awareness. 

The Food Safety and Quality Service is primarily a public health 
oriented organization with heavy responsibilities for assuring the pub- 
lic that the foods they eat are safe, wholesome, nutritious and honestly 
and informatively labeled. We ask of food: Is it safe? Is it what 
it purports to be? Is it nutritious? Is it labeled honestly and 
informatively? 

(97) 



98 



As the primary public health component of the Department of Agri- 
culture we have a difficult task. We have in the United States a variety, 
convenience, and abundance of food that is unparalleled in the human 
experience. This achievement, as mentioned earlier, required the de- 
velopment of a highly mechanized agriculture and a highly sophisti- 
cated and automated food processing and packaging industrial com- 
plex. Both these production capabilities are dependent upon chemicals 
to provide the yield and variety we enjoy today. These same chemicals, 
however, have contributed to what appears to many to be a deteriorated 
quality of life. 

Agricultural runoff with fertilizer, pesticide, and herbicide residues 
contributed significantly to the pollution of our water supplies. Anti- 
biotics, and growth-promoting and therapeutic drugs are required to 
deliver the meat foods in the quantity and at the prices we enjoy and 
these occur as residues in edible tissues. The food processing and pack- 
aging industries depend on an array of chemicals to achieve the tech- 
nical effects expected by consumers. Without chemicals we could not 
have the array available to us in the sujDermarket, but one wonders at 
what price has this been achieved ? Is the time upon us to measure the 
benefits and costs of our present chemically oriented production and 
food processing capabilities ? 

Because both desirable and undesirable chemicals enter our food 
supply through either direct addition or through environmental con- 
tamination it is necessary that foods be monitored for their chemical 
content to assure that approved chemicals are used at levels and under 
conditions commensurate with their approval and that harmful chemi- 
cals are not present. 

Our Food Safety and Quality Service is committed to a continuing 
safety review of chemicals purposefully added to our foods. These 
food additives must first pass review for safety by our sister agency, 
the Food and Drug Administration. However, recognition by FDA 
of a prior sanction, approval as generally recognized as safe (GRAS) 
or approval as a food additive has not and will not prevent us from 
exercising our independent responsibilities. For example, a few years 
ago we refused the meat industry permission to use sorbic acid, an 
approved additive, in meat salads because of concern that such a use 
might mask spoilage due to food poisoning organisms. More recently, 
we have served notice on the meat industry that nitrites and nitrates 
may be banned unless proof is forthcoming that these additives, which 
have prior sanction for use in meat products, do not result in the 
formation of carcinogenic nitrosamines in meat foods during produc- 
tion or preparation for eating. 

In addition to purposeful additives, environmental pollutants gain 
entry to our food supplies through uptake from soil and water, through 
inadvertent direct contamination, and from misuse. PCB, PBB, di- 
oxins, pentachlorophenols, polynuclear aromatics, trichloro methanes, 
and a host of other organic compounds can and do enter our foods. 
Some are toxicologieally sic^iificant at levels as low as parts per billion. 
Lead, cadmium, arsenic, zinc, chromium, and other heavy metals are 
present in our foods as a result of environmental pollution or indus- 
trial processes, or in some instances as purposeful additions. 

Our most important tool for providing assurance of the safety of 
our meat food products relative to contamination with residues of 



99 



substances is a monitoring program designed to detect the presence of 
residues in animals, at the time of slaughter. Our FSQS monitoring 
program provides us with continuing information on residue trends 
and levels in our meat and poultry supply. This program also helps 
us to identify individual producers who have failed to properly con- 
trol chemicals in animals going to slaughter. 

Each year we collect, at slaughter, tissue samples from 20,000 to 
25,000 animal units. (An animal unit is one red meat animal or five 
poultry.) On these samples we perform approximately 130,000 labora- 
tory analyses, designed to detect and quantify approximately 60 dif- 
ferent chemical compounds. The sampling system is statistically de- 
signed to provide a 95-percent level of confidence that a 1 percent or 
greater violation rate for a particular residue will be detected. Our 
samples are collected from 2,200 slaughtering plants located through- 
out the United States, in which over 90 percent of the livestock and 
poultry destined for human food are slaughtered and inspected by 
FSQS personnel. 

Our monitoring program has been in operation for a number of 
years now. Therefore, we are in a position to make an assessment of 
the performance of American agriculture toward reducing the levels 
of chemical residues in meat and poultry. That performance, to date, 
leaves much to be desired though some encouraging accomplishments 
by certain agri-business segments are commendable. For example the 
broiler industry has done an excellent job of reducing levels of resi- 
dues of both pesticides and drugs. In 1973. the violation rate for all 
types of residues in chickens was 2.2 percent. In 1976 the rate was 
down to 0.4 percent. In turkeys, the violation rate was 1.2 percent in 
1973, and was reduced to 0.6 percent in 1976. In ducks, the 1974 rate 
was 1.8 percent and dropped to 0.3 percent last year. 

The livestock industry, on the other hand, has not done as well. Al- 
though we are not finding as many pesticide violations as we were a 
few years ago, we are still experiencing violations due to selected pesti- 
cides. For example, dieldrin residues in cattle from the Midwest are 
a continuing problem. 

The most serious residue problems in livestock, however, are not 
pesticide residue violations but violations of sulfonamide residues in 
swine and antibiotic residues in cattle. 

In swine, we have been finding violative levels of sulfa drug residues 
in 10 to 15 percent of the animals tested. This violation rate has been 
relatively constant for several years, in spite of the fact that we twice 
increased our sampling rate. In dairy cattle we are finding violative 
levels of antibiotics in 15 percent of the animals tested. The question, 
of course, is why the high violation rates in swine and dairy cattle. 

In swine, sulfa drugs are being used at low levels as feed additives 
for purposes of promoting growth and preventing atrophic rhinitis. 
The most probable cause for violations is misuse of the drugs through 
overdosing or through nonobservance of the withdrawal period. I 
suspect that farmers and feed mill operators fail to clean feed troughs, 
holding bins and mixers between batches of medicated and nonmedi- 
cated feeds, thus causing cross-contamination and violations. In addi- 
tion the 7-day withdrawal period may be insufficient for bioelimination 
by the treated animal and I understand that FDA is reviewing this 
situation presently. 



100 



The antibiotic residue problem in dairy cattle is still under investi- 
gation. Our data indicate that antibiotics are being used at therapeutic 
levels and the violations are commonly associated with the clinical 
conditions of mastitis and pneumonia. Though we cannot substantiate 
our suspicions we are of the opinion that farmers are treating sick 
animals and when they fail to respond to drug therapy the animals are 
sent to slaughter without withdrawal or with inadequate or fore- 
shortened withdrawal. 

One may ask why is it that the poultry industry has done so much to 
reduce violations while the red meat industry has done so little. I be- 
lieve the answer lies in the different structures of the two industries. 
Over 80 percent of the poultry produced in the United States is under 
the control of about 200 management systems. Residue violations in 
such a vertically integrated industry affect a very large number of 
birds, which receive feed from a common source under similar condi- 
tions. The cost to an integrated operator of a violation is huge and 
therefore a similarly large incentive is operative for establishing effec- 
tive controls against violative situations. 

By contrast there are few integrated beef producers and the indus- 
try is composed largely of thousands of independent producers of 
swine and dairy cattle. The finding of a violative residue level affects 
a small segment of the total industry. Such a violation causes economic 
hardship to a single individual after his farm is identified as one from 
which violative animals issued and only when he attempts to market 
other animals. His plight, however, is rarely of sufficient magnitude to 
gain notice within the total industry and little of deterrent value is 
gained from his experience to influence other small producers to adopt 
preventive and corrective practices. 

What can be done about these residue problems? There are several 
approaches. In the case of continuing misuse of animal drugs, FDA 
could limit their use by requiring that such drugs be prescribed and 
used only under veterinary supervision. This will have the effect of 
placing an independent third party into the picture. Hopefully, veteri- 
narians accepting responsibility for prescribing drugs will take that 
responsibility seriously and observe proper dosages and withdrawals. 

Another approach is that of a livestock identification system. With- 
out such an identification system we cannot trace animals with viola- 
tive residues back to their farm of origin. An identification s} T stem 
alone, however, is not enough. We need legal authority to put a hold 
on a producer's livestock when we have good evidence that his live- 
stock contain illegal residues. Presently, with thousands of producers, 
we cannot keep track of them all and if a producer chooses to do so he 
can ship his animals to a distant slaughter market as a means of avoid- 
ing herd/farm identification. We are requesting legislative authority 
to implement these two systems. 

Wheal chemicals are used in agriculture, you can safely predict that 
some people will misuse them and we will find residues in food. There- 
fore, the surest way to prevent having harmful or potentially harmful 
chemicals present in our food is to not use chemicals in the first place. 

Obviously, this is not possible, since American agriculture could not 
achieve the high levels of production now existing without chemicals. 
Nevertheless, I believe it is time for USD A, the "People's Department," 



101 



to spend more on research to find nonchemical means of controlling 
plant and animal pests and diseases. In addition, we should not be ad- 
vocating production methods like close confinement rearing of animals, 
which because of the nature of the practice requires the use of drugs 
and feed additives. 

The time is upon us to reexamine our agricultural policies and prac- 
tices with a view toward assessing the threats to our health and envi- 
ronment due to a chemically oriented agriculture technology. Where 
costly or long-term actions may be required to correct the adverse ef- 
fects of a chemically oriented agricultural practice we should study 
and measure the future implications of such a practice before Ave adopt 
it. Though we are justifiably proud of our national capability to pro- 
vide food and fiber for our needs as well as those of other nations, we 
must not lose sight of the fact that errors of the moment committed to 
achieve short-term gains can have long-term adverse effects. History 
has repeatedly demonstrated that indiscretions of the past are costly 
of future human welfare. 



ADDITIVES : WHY, WHEN", WHAT FOE 

(By Paul F. Hopper,* Group Director, Strategic Technical Planning and Resource 
Management, General Foods Corporation) 



There's not a page of the newspaper, nor a flick of the dial today, 
that doesn't bring us some new concern, some new "crisis" to worry 
about regarding the additives in our food supply. "Instant science" 
is the fad, and the self-proclaimed expert is having his day in the 
Sun. 

There is mass confusion — which at times seems to be bordering on 
the fringes of mass hysteria. Sound, reflective, scientific judgment 
seems unable to become factored into the equation of how society looks 
at the safety issues. 

Now, more than ever, it has become apparent that we must take a 
giant step back from the "trees" and see if we can't gain a better per- 
spective of the "forest." I welcome the opportunity to be part of this 
program today on "Inside Food Production," and to address my 
remarks to some of the current dimensions of additives in today's 
modern food processing. 

For the purpose of today's talk, I am going to focus on those addi- 
tives which are intentionally used in food processing, although much 
of what I have to say regarding safety will apply equally well to those 
additives which find their way to our dinner table, without really 
having been needed or wanted. So let us say then, for the sake of 
simplification, that an additive is a component of food that man has 
introduced to enhance the nutrition, the keeping quality, the func- 
tionality, the coiwenience, or the palatability of that food. 

When we sweeten a food with sugar or honey, we have technically 
introduced an additi ve. When we salt and pepper our meat or potatoes, 
we are using additives. And so on with baking powder, and vinegar 
and vanilla and hundreds more items you'll find on your kitchen 
shelf. 

When you come right down to it, your great-great-great grand- 
mother's kitchen was the first food production plant — and she used 
additives. They took the form of smoke, and salt, and herbs or spices, 
but she was doing exactly what we food scientists are doing today. She 
was taking God's bountiful harvest and adding her own touch to make 
the food more palatable, or to preserve it so there would be something 
to eat during the long winter. 

So why all the furor over additives, if we've had them around so 
long to fulfill these vital functions? There are a number of reasons. 
Whether valid or not, our ancestors didn't consider what they were 
doing as a process of introducing additives. They knew that it worked 

*Tho views expressed In this paper are those of the author and not necessarily those of 



(102) 



103 



and everybody was better off for having the food available for a longer 
period of time. Today, we have zeroed in on additives. We have defined 
them, regulated them, labeled them — and the press has done a good 
job of indicting them. Additive has become a household word to be 
uttered with disdain and dismay. 

Second, much of what grandma used was taken from the nautical 
or the botanical world, and assumed, perhaps naively, to be whole- 
some and safe. Today many of our additives, even those identical to 
nature, come from man's chemical f actory, and therefore automatically 
become suspect. The writer with a flair for the sensational, will usually 
find some way to add the words, "derived from the coal-tar industrj^" 
if he wishes to evoke a guaranteed negative feeling about a substance. 

Third, the combination of new scientific knowledge and the literal 
application of today's legislation and regulations has resulted in the 
removal from the food supply of several well known additives. This 
certainly cannot help but raise doubts in the mind of the public about 
the safety of additives in general. 

So much for our initial thoughts on the subject of additives. Let's 
get down to the business of their use "inside food production," and 
then at the end perhaps we'll have time to talk about possibly "a better 
way" for society to deal with the subject of food additives. 

The purpose of additives 

As I mentioned before, all food additives are intended to accomplish 
a functional purpose. These may be classified as follows: nutritional 
supplements, preservatives and antioxidants, emulsifiers, stabilizers 
and thickeners, acids and bases, curing agents, leavening agents, matur- 
ing, and bleaching agents, sequestrants, anticaking agents, humec- 
tants, foaming agents, sweeteners, and flavors, spices and colors. 

Let's begin to take a look at each of these in order to identify the 
principle additives within each group and to discuss their purpose and 
use. 

Nutrition 

In the harvesting, processing, and storing of certain basic agricul- 
tural commodities, the nutritional value may have been affected. It 
is therefore important to restore these commodities to their original 
levels of essential nutrients, especially if that foodstuff is an impor- 
tant source of that nutrient in our daily diet. 

In addition to simple restoration, certain commodities are deficient 
in some of the essential nutrients and it is important to enrich these 
substances — such as flour — so that they can be an appropriate vehicle 
for improved nutrition in our diet. 

Finally, even though certain food and beverage products may not 
be considered a normal source for a nutrient, we may wish to fortify 
that product in order to overcome a nutritional deficiency that is pres- 
ent in our population. For one or more of the above reasons, the addi- 
tion of vitamins and minerals, as well as selected amino acids is ex- 
tremely important in preventing or overcoming the nutritional defi- 
ciencies that exist in our country. 

Of specal importance are vitamin A, vitamin C, calcium, iron, thi- 
amine, niacin, and riboflavin. In addition, the amino acids methionine 
and lysine will help to improve the nutritive value of the proteins 
present in many foods. 



104 



Preservatives 

It goes without saying that especially now with the ominous spector 
of world food hunger hanging over our heads we must insure that the 
food produced in the fields and orchards of our country ends up on the 
dinner table with a minimum amount of loss. Preservatives play a key 
role in preventing microbial spoilage and antioxidants serve to pre- 
vent chemical deterioration through rancidity. 

Among the principally used preservatives are sodium and calcium 
propionate, sodium benzoate, ascorbic acid, sulfur dioxide and the 
much discussed nitrites and nitrates used in curing meat. 

Among the antioxidants are ascorbic acid, citric acid, BHT, BIIA, 
and the tocopherols of which vitamin E is the most notorious. 

Additives for use of textural reasons include emulsifiers, which help 
to stabilize things such as salad dressing, and thickeners to provide 
body and mouth feel to many products. Included in these groups are 
lecithin, the mono and diglycerides, polysorbate-60, vegetable gums 
and starches and pectin and gelatin. 

Acidulants and buffers 

Tartness is an important characteristic of many products, especially 
those with fruit flavor bases. Large quantities of citric acid, fumeric 
acid, adipic, and malic acids are added to soft drinks and desserts to 
give them the desired flavor characteristics. In addition, alkalis and 
buffers such as the phosphates help to adjust the pH of various foods, 
both for flavor and stability. 

Leavening agents, maturi/ng and bleaching agents 

These are substances used extensively in the baking industry and 



process by which doughs could rise and cakes could be made light and 
fluffy. Our most common chemical additives in this category are sodium 
bicarbonate, sodium aluminum sulphate, and calcium phosphate. 

Sweeteners 

In addition to sucrose and dextrose, several other carbohydrates are 
commonly used for sweetening food ; these include high fructose corn 
syrup and honey. I need not tell you the fate of the synthetic sweet- 
eners ; first with the ban on cyclamates of some 8 years ago, then with 
the stayed approval of aspartame which has never commercially seen 
the light of day. Now, with the delisting of saccharin which for all 
practical purposes seems a certainty for the end of this summer. 

Work continues on alternatives such as glycerrizine, monnellin and 
others, but as of the moment, there is no well accepted approved alter- 
native in the nonnutritive sweetener area. 



I could go through a list of additional substances such as sodium 
silico aluminate, ethylenediamine, tetra acetic acid and others which 
act as anticaking agents, sequestrants and the like; and of course, talk 
about the important uses for sodium nitrate and nitrites in providing 
flavor and color for curing meats as well as inhibiting the growth of 
the potent microbial poison clustridium boteriridium. 

It would take far longer than I have time allowed to touch upon 
each and every one ; perhaps we can cover some of these in the question 
and answer session to follow. 



serve the purpose 




accelerating the 



Others 



105 



The quantities used 

Depending on what you want to include from the list of flavor 
chemicals, we can count up to 2,500 compounds that qualify as food 
additives. It sounds overwhelming — but if we stop for a moment and 
take a close look at the list, we find that much of what we actually in- 
clude were old friends to grandma. 

Of the nearly 140 pounds of additives in our yearly diet, 102 pounds 
comes from sucrose — ordinary table sugar ; 15 pounds comes from salt, 
and 13 pounds comes from dextrose, most commonly known as corn 
syrup. In these three additives alone we find 93 percent of the 
consumption. 

Xext on the list comes approximately 30 substances used routinety 
in the household as well as the production plant, such as yeast, citric 
acid, baking soda, mustard, pepper and the like. The final 1.5 percent 
of the additive intake comes from the remaining 1,900 additives — 
most of which are flavors. In fact, over half of those are consumed at 
a per capita level of less than one two hundred thousandths of a pound 
per year. 

Some guidelines for use 

There are some good manufacturing practices that most companies 
either formally or informally abide by in their use of additives. 

First, no additive should ever be introduced into food unless it has 
a functional reason for being. 

Second, no additive should be used that does not have approval for 
the intended use, or is considered GRAS. 

Third, no additive should be used at a level greater than that needed 
to accomplish the intended purpose, regardless of the approved level. 

Fourth, all formulations should be reexamined periodically to be 
sure that the additives in use are still needed. 

Finally, it goes without saying that appropriate quality assurance 
and quality control procedures are in place to be certain that the 
additive is being used at the right level and is being uniformly dis- 
persed throughout the entire production run. 

How safe is safe? 

When it comes to the question of safety, w T e need to very clearly 
define what we mean. It is often felt by the nonscientific public, that 
there should be a battery of tests which additives should pass through, 
and then at the end of these, we should be able to positively state that 
a substance is safe or not safe. The facts are that there is no such 
thing as absolute safety — and that's true with almost anything we 
come in contact with in our lifetime — even food itself. 

What science does is to design the battery of tests mentioned above, 
based upon the best available scientific information, using animals 
as the experimental model, and then to subject the new additive to 
these tests at various dosage levels. The results are examined to de- 
termine if under the intended conditions of use in the food supply, 
there is any real risk of hazard to man. In extrapolating the 
data, the FDA usually applies a 100 to 1 safety factor as needed 
insurance. 



106 



Dr. Virgil Wodicka, former Director of the FDA's Bureau of Foods, 
in addressing a group concerned with food safety last fall explained 
that : 

When we feed a test substance to animals at levels that are 
harmful, as we decrease the dose, we find that the severity of 
the damage may diminish and the percentage of animals 
affected certainly drops off. In fact, it has been widely ob- 
served that the probability of an effect is directly propor- 
tional to the logarithm of the dose. To illustrate this rela- 
tionship, let us assume that this relationship has a slope of 
one. In real life, it is almost never this low. Then say we get 
one unit of response to one unit of dose. At 10 times the unit 
dose, we get twice the response. At 100 times the unit dose, we 
get 3 times the response. 

If we now decrease the dose, we reach a level where there 
is no observed response. This has been termed the no-effect 
level. Our present regulations call for the establishment of 
this point and then permit a maximum intake of one one- 
hundredth of this amount. In effect, this amounts to backing 
off two logarithm cycles from the no-effect dose. This cri- 
terion is used in other countries and in international bodies 
as well. 

In effect, we are using a mathematical model to apply our 
experimental findings and not a very impressive one. It has a 
scientific basis, which I shall not take the time to go into, 
but the evidence supporting this model is scanty. The best 
justification for it is that to the best of our knowledge, it 
has not gotten us into trouble. It may have denied us the use 
of some useful materials, but it has not resulted in toxicity 
so far as we know. 

The need for a model arises from the fact that the doses 
at which we observe the response are ordinarily far higher 
than the doses to which we expect people to be subjected. We 
can see the relationship between dose and response in the 
range fed, but what is the relationship between dose and re- 
sponse in the range a hundredth or a thousandth or a ten- 
thousandth of the lowest dose fed ? We do not have experi- 
mental techniques for finding out, so we have to assume some 
sort of dose/response relationship and project downward to 
the dose range of practical interest. 

This business of projecting downward is a technique called 
by mathematicians extrapolation. In science, it is a no no. 
Science, after all, means the body of things we know. When 
we extrapolate, we can infer what will happen, bin; we cannot 
know. A conclusion of safety, therefore, must inevitably be 
based on an informed judgment; it does not follow directly 
from the experimental observations. 

A new look at safety criteria 

Where do we go from here? Can we continue to live in a world of 
uncertainty and fear when it comes to the question of additives? There 



107 



is a body of concerned citizens that has said, "no."' They have taken a 

hard look at the current trends and said : 

No way can we continue to produce an abundant supply of 
safe, wholesome food, with the confidence of the consumer 
behind us, if we continue to operate with the antiquated cri- 
teria for judging safety that we've been using for the last 
twenty years. 

Spearheaded initially by industry, a steering committee wns or- 
ganized to study the situation. Many different ways were explored, 
and finally, out of these deliberations a new concept and a new or- 
ganization was born. It is called the food safety council. 

The food safety council is unique in that its total energies are directed 
toward the development and implementation of sound, realistic criteria 
by which society may judge the safety of its food supply. 

It is further unique in that it is governed by a board that represents 
a broad, cross-section of society, some of whom may have been in ad- 
versarial roles in the past, but who in this organization are jointly 
dedicating their talents to the positive solution of a global problem. 

The first task before the council is the development of a comprehen- 
sive set of new scientific criteria for assessing safety based upon the 
most up-to-date validated scientific information available. To that end 
a scientific committee has been formed under the leadership of Dr. 
Virgil Wodicka. Among its members are: Dr. Frank Carlborg, con- 
sulting statistician ; Prof. Jerome Cornfield, George Washington Uni- 
versity ; Dr. Peter Elias, Institute f uer Strahlentechnologie ; Dr. E. M. 
Foster, Food Research Institute ; Dr. Leon Golberg, Chemical Indus- 
tries Institute of Toxicology; Dr. Bernard Oser, consulting toxi- 
cologist; Dr. John Van Ryzin, University of Wisconsin; Dr. Ian 
Munro, Canadian Food and Drug ; and Dr. Virgil Wodicka, consult- 
ing food technologist. 

This blue ribbon group of international scientists is assembling and 
critically reviewing the methodology of food safety evaluation. The 
committee plans to publish a treatise in the next 9 to 12 months that 
will have addressed itself to the numerous scientific issues involved. It 
will serve as the scientific basis on which new criteria for safety can be 
established. 

The food safety council was formed to foster and develop criteria 
for the safety and wholesomeness of foods and food ingredients, to pro- 
vide the public, consumers, and food scientists with scientifically sound 
information, and by developing such information to assist national 
bodies in formulating sound policies, laws, and regulations to insure 
the safety, wholesomeness and abundance of foods. 

Any organization or corporation within the United States or else- 
where having an interest in the purpose of the council is eligible for 
membership. In the few short months of its existence, it already 
has 26 dues-paying members drawn from the food or food-related 
industries. 

The group is governed by a board of trustees currently made up of 
26 representatives from industry, academia, consumer organizations, 
government and professional groups who cover a wide range of talents 
and expertise. 



98-723—77 8 



108 



Once the scientific committee's report has been completed and ap- 
proved by the board of trustees, the next task of the food safety coun- 
cil will be sharing these criteria with first the rest of the scientific 
world to be certain that the new criteria are valid, and then to assist 
in the societal process of how best to use these criteria in the decision- 
making on matters of safety and wholesomeness. 

The bylaws state : 

And by developing such (scientific) information, to assist 
national and international legislative regulatory and other 
governmental bodies in formulating sound policies, laws, and 
regulations to insure the safety, wholesomeness and abun- 
dance of foods. 

There is a bright new hope on the horizon. With continued support 
of both the industrial and the public sector — working together — we 
can find a better way. 



CONCERNS ABOUT CHEMICALS IN FOOD AND FIBER 

PRODUCTION 

(By Walter Wilcox, Consultant, Office of Technology Assessment) 



Few nonfarm people appreciate the vital role chemicals play in 
the production of food and fiber. Chemical fertilizers and pesticides 
account for most of the chemicals used in food and fiber production. 

Commercial livestock and poultry producers use formulated feeds 
with mineral and vitamin supplements to meet the nutritional require- 
ments for reproduction, milk and egg production, growth, and fatten- 
ing. In addition therauptic drugs are used to treat livestock and poul- 
try and subtheraputic drug feed additives are now used in more than 
half of the swine, poultry, and cattle fattening rations. 

Synthetic hormone compounds also are used to improve the set of 
fruit for certain tree fruits, to thin the fruit for other tree fruits, to 
hasten the maturity of some crops, to prevent suckers on tobacco plants 
and to defoliate some crops to facilitate harvesting. 

Few people are aware that the crops and livestock which make up 
most of the world's food supply live in a hostile environment shared 
by about 50,000 species of fungi that cause more than 1,500 diseases. 

They are in competition with 30,000 species of weeds throughout the 
world. More than 1,800 of these species cause serious economic losses 
each year. About 15,000 species of nematodes attack crop plants and 
more than 1,500 of these cause damage. 

More than 10,000 species of insects create serious crop and livestock 
losses each year. 

In this environment an amazing varietv of chemicals have been 
found useful in food and fiber production. More than 70 generic drugs 
and chemicals are used to maintain the health and promote the pro- 
duction of animals and animal products used for food. U.S. producers 
of food and fiber have approximately 8.000 different formulations of 
pesticides available for their use. Each company that markets a given 
formulation must have its own registered label. There were probably 
30,000 different pesticides registered for use in the United States in 
recent years. Over 3,500 companies appear to hold Federal registration 
for one or more products. Pesticide products may be registered by a 
company for intrastate sale only : an estimated 2,000 products are thus 
registered in California alone. 

Most animal and poultry drug feed additives have come into use 
in the last 40 years. The great expansion in the use of chemical herbi- 
cides a J so took place in recent years. In the past 10 years the use of 
both pesticides and chemical fertilizers in the United States has almost 
doubled. The production and use of herbicides (to control weeds) has 
grown at the rate of 15 percent a year during the past 5 years. Cur- 

(109) 



110 



rently herbicides account for about 58 percent of the value of total 
pesticide sales. 

In spite of the tremendous increase in the use of pesticides in recent 
years the Agricultural Research Service estimates that pests, including 
weeds, continue to cause an estimated 30 percent annual loss in poten- 
tial production of food and fiber. 

It is difficult to estimate the contribution chemicals make to total 
food and fiber production. The drugs and chemicals used in livestock 
and poultiy production account for about 5 percent of the total live- 
stock products marketed, or 82 billion a year. Dr. W. C. Shaw of the 
Agricultural Research Service estimates that agricultural chemicals, 
including fertilizers, pesticides and growth modifying chemicals are 
responsible for about 60 percent of the total output of food and fiber in 
United States. 

Regardless of whether agricultural chemicals account for 40, 50, or 
GO percent of total food and fiber production their continued use on a 
large scale is required if current levels of production are to be main- 
tained. 

Food and fiber production in the United States has increased by one- 
half in the past 25 to 30 years. In another 25 to 30 years or between the 
years 2000 and 2010 another 50 percent increase in production will be 
needed. Analysts in the Economic Research Service and at the land- 
grant universities expect farm output to continue to grow at the rate 
of 1.5 to 2 percent a year primarily as a result of the introduction of 
improved technologies, including improved genetic strains of plants 
and animals and a continued growth in the use of livestock and poultry 
feed supplements, chemical pesticides, and fertilizers. 

Recent projections indicate that in another 25 to 30 years U.S. 
farmers will double their current use of both pesticides and chemical 
fertilizers. There is no doubt in my mind that if our future national 
and world food needs are to be met we must find acceptable ways of 
using larger, rather than smaller quantities of chemicals in food and 
fiber production. 

This can be achieved, in my opinion, with less adverse effect on the 
environment and on human health than in recent years. I recently 
attended the oversight hearings of the Subcommittee on Agricultural 
Research and General Legislation of the Senate Committee on Agri- 
culture. Nutrition, and Forestry. The subject was integrated pest man- 
agement. Representatives from the Department of Agriculture, the 
Environmental Protection Agency, the National Science Foundation, 
the Council on Environmental Quality, the National Agricultural 
Chemicals Association and from several land-grant universities agreed 
that substantial progress has been made in recent years in integrated 
pest management programs. 

Representatives from Texas A. & M. University reported that a 
new short season cotton variety has been developed for the Lower 
Rio Grande Valley, which permits adequate pest control with 40 per- 
cent fewer chemical pesticides than had been used on traditional vari- 
eties Using integrated pest management in the irrigated areas this 
short season cotton was grown without pesticides, and with less irri- 
gation water and less fertilization than conventional practices. Con- 
ventional cotton varieties produced with conventional practices re- 



Ill 



quired 12 applications of pesticides and produced approximately the 
same acre yields. 

At these hearings I learned that Texas cotton growers have orga- 
nized a Texas Pest Management Association which will take over 
most of the necessary scouting, monitoring, and advisory services re- 
quired in an effective integrated pest management program. 

In Arkansas, a model of the cotton pest system has been used to 
develop a computerized forecasting network for the management of 
the cotton bollworm. This system provides a basis for recommending 
control measures to cooperating growers within a 50 square mile area : 
the growers make no pesticide application unless advised to do so by 
project personnel. In 1976 only one application of pesticide was re- 
quired. In previous years the community average was 12 pesticide 
applications. Preliminary reports on 1977 growing conditions indicate 
similar success in reducing pesticide applications the second year. 

Assistant Secretary Cutler told the subcommittee that 80 percent 
of the USDA insect and plant disease control budget is directed 
toward fundamental biology and alternative methods of pest control. 
Dr. Clark of the National Science Foundation emphasized that prog- 
ress in integrated pest management was dependent, in many cases, on 
basic research in biology, physiology, genetics, biochemistry, ethology 
and a number of related sciences and on an interdisciplinary approach 
to the solution of specific problems. 

Progress in integrated pest management will depend in part on 
development of acceptable means of obtaining the full cooperation 
of all producers within designated growing areas. The issue of liability 
on the part of the technical staff providing the advisory services also 
may cause problems. 

The ratio of pesticide and fertilizer prices to grain and cotton prices 
is much higher than it was 5 or 10 years ago when current traditional 
practices were adopted. Clearly increases in fertilizer and pesticide 
prices in recent years have forced producers to look for management 
practices which economize on the use of both fertilizers and pesticides. 
They are actively seeking management practices and equipment which 
will reduce application rates and environmental pollution. Every 
season improvements are being made in fertilizer placement equip- 
ment and pesticide applicators. As more is learned about the require- 
ments for plant growth and the control of each species of insects or 
weeds, chemicals can and will be used more sparingly because of costs. 

There are a few outstanding successes in the development and use 
of biological pest control methods. Most pilot integrated pest manage- 
ment programs used predator insects as a part of their pest manage- 
ment programs. Available evidence, however, indicates that biological 
controls are likely to play only a small role in pest management for 
some time in the future. 

Almost all research in biological pest control is conducted bv public 
agencies. Private industry has no incentive for research in this area 
since the predator species cannot be patented and sold under brand 
names. Although USDA and the land-grant universities have a sub- 
stantial research program designed to develop new biological pest 
controls, some believe that it should be even larger. 

Producers will shift to biological pest controls if and when they 
become economically feasible. In the interim they must continue to use 
chemical pesticides. 



112 



The policy issue is not one of banning all chemicals from use in 
agricultural production. Rather it is one of assessing the benefits and 
hazards of specific chemicals and specific uses of certain drugs or 
chemicals. On the basis of such assessments the continued use of the 
most hazardous chemicals will be banned by the Environmental Pro- 
tection Agency or the Food and Drug Administration. 

The EPA already has banned the use of several hazardous pesti- 
cides. It is now in the process of actively reviewing the benefits and 
hazards of 20 now being marketed. In a recent report to the Senate 
Agriculture Subcommittee. EPA indicated it has identified 45 other 
pesticides for similar review in the near future. The FDA also is in 
the process of withdrawing approval for the use of several drugs cur- 
rently used as additives in livestock feeds. 

At this point I would like to emphasize that within a substantial 
range of variation in total U.S. food and fiber production, a 1-percent 
reduction in supply is associated with more than a 2-percent increase 
in prices received for the products. If the use of sufficient drugs and 
pesticides were banned to result in a 2-percent reduction in farm out- 
put, farm prices would rise even more proportionally, resulting in an 
increase in net farm income. This is a point often missed by both pro- 
ducers and consumers. 

It is important to appraise the economic impact of banning a spe- 
cific hazardous chemical, because of its impact on specific producers 
who have incorporated the use of that chemical into their manage- 
ment practices. For example the banning of antibiotic animal feed 
additives would adversely affect poultry and swine producers but the 
ban might benefit cattle producers, because of less competition for the 
consumer dollar from poultry products and pork. Feed grain pro- 
ducers also would gain from a ban on antibiotic feed additives, as 
more feed would be required for pork and poultry production. 

It is my considered judgement that the economic impact of a sub- 
stantial curtailment in the use of chemicals in the production o,f food 
and fiber after an adjustment period, would fall more heavily on con- 
sumers than on the producers. This is not an issue that should divide 
producers and consumers. 

Each specific pesticide and drug feed additive, however, has a unique 
cliental, usually only a small fraction of the total food and fiber pro- 
duction industry. Most pesticide and drug feed additives have a num- 
ber of substitutes and the economic effects of their withdrawal depends 
on efficiency of available substitutes. 

Most pesticides also perform specific rolos in integrated crop and 
livestock management systems and their withdrawal may require sub- 
stantial changes in related production practices. Broilers and eggs arc 
now produced in large concentrated units with substantial dependence 
on drug feed additives to increase feed utilization efficiency and to 
]> re vent the outbreak of diseases. If antibiotics and nitro.furans as 
feed additives are banned it is probable that current management prac- 
tices and the structure of the poultry industry will change signifi- 
cantly. Similarly the production of corn with no-till or limited tillage 
requires the use of substantially more herbicides per acre than con- 
ventional tillage practices. 

A substantial amount of the environmental pollution from agricul- 
tural chemicals is the result of careless and wasteful application prac- 



113 



tices. Continuing research and education programs and sharply in- 
creased costs will effectively reduce this source of pollution in the 
future. If the EPA and the FDA find it necessary to ban some cur- 
rently used hazardous pesticides and animal drugs, as now appears 
probable, the industry will quickly adjust to the new situation, prob- 
ably without a serious increase in costs or a significant reduction in 
production. 

Consumers are properly concerned about the safety of their food 
and the environmental pollution arising ,f rom the use of specific chem- 
icals, but they should remember that most of the 50-percent increase in 
food and fiber production in the past 25 years is attributed to increased 
use of chemical fertilizers and pesticides. 

If the concern about food saf ety and environmental pollution should 
result in banning any substantial proportion of the pesticides and ani- 
mal drugs now in common use, consumers must expect to pay substan- 
tially higher prices for susbtantially smaller quantities of lower qual- 
ity food and fiber products. 



THE ECONOMIC OUTLOOK FOE FOOD 

(Bv Kenneth R. Farrell, Acting Administrator, Economic Research Service, 

USDA) 



INTRODUCTION 

The outlook for retail food prices in 1978 is dominated by four pri- 
mary factors: (1) Prospects of relatively large supplies of, and thus 
low prices for, U.S. farm products; (2) continued increases in the 
costs for marketing inputs, particularly labor; (3) some moderation 
in retail prices for the foreign foods and fish category; and (4) uncer- 
tainties regarding worldwide weather, the outcome of food additives 
regulations and energy legislation, and the farm production impacts 
implied by passage of the Food and Agriculture Act of 1977. Overall, 
we expect average retail food prices in 1978 to increase 4 to 6 percent. 

For the fifth consecutive year we expect the farm value of U.S. pro- 
duced food to hold at about $56 billion in 1978. Eetail prices will, how- 
ever, continue their seemingly inexorable rise. Also, for the second year 
in a row, labor costs in the marketing of domestically produced food 
will likely exceed the farm value of those foods in 1978. This fact alone 
says a great deal about the current state of the U.S. food price situation 
and one I will address directly later in this talk. 

First I will take a few minutes to talk about food price determinants. 
Next I will review what happened in 1977. Finally, we will turn to a 
more detailed examination of the major forces which will influence the 
retail food price situation next year. 

FOOD PRICE DETERMINANTS 

The food marketing system in the United States is a very complex 
part of our vast food and agricultural sector. The system has often 
been subject to substantial criticism. Consumers blame the system for 
"high" food prices. Farmers blame it for "low" farm prices. As food 
prices continue to rise, more people tend to perceive the marketing sys- 
tem as simply "charging a lot for doing very little." What then should 
we expect to be the relationship between farm and food prices ? 

Farm prices and food prices are generated in different markets, 
subject to different supply and demand forces. Farm prices of raw 
agricultural products are largely influenced by what is produced, both 
on U.S. farms and worldwide. What gets produced at the farm level is 
heavily dependent upon rather unpredictable natural forces such as the 
weather, pest infestations or plant and animal diseases. 

The markets in which food is sold operate quite differently. Proces- 
sors purchase raw agricultural products at prices determined largely 

(114) 



115 



by relative product availability. They then add processing, transporta- 
tion, and packaging services and ultimately sell a differentiated food 
product to wholesalers and/or retailers. Wholesalers and retailers, al- 
though they may make fewer physical changes in the product form, 
add still more services. 

Clearly then there is good reason for some variability in movements 
between farm prices and prices for food. It is true that farmers con- 
tribute the raw material base for most food products. But it is also true 
that farm products are only one input into the food marketing process. 
That raw product must be converted into a form consumers are willing 
to purchase ; it must be delivered to a place where the consumer may 
obtain it ; and, it must be available at a time when the consumer wants 
it. And these food marketing services involve more than just transport- 
ing, processing, and distributing farm products. Food retailers, in par- 
ticular, have invested billions of dollars in the land, buildings and 
equipment necessary to complete the present network of modern super- 
markets. These stores have been built with the shopper in mind — wide 
aisles, air-conditioning ; and, carry out services. Services such as check 
cashing and long operating hours (sometimes 24 hours a day) are com- 
mon. Food prices must, therefore, reflect both the costs for the raw 
farm product as well as the costs involved in providing marketing 
services. 

Consumer demand, therefore, plays a key, but often neglected, role 
in the widening farm to retail price spread. As income increases, the 
consumer demand for food system services can be expected to increase 
at a faster rate than the demand for farm output. As services become 
! more important relative to the total product sold, the farm level price 
for the basic raw ingredient becomes less important. In addition, since 
there is a rather loosely defined biological constraint on how much food 
people will ingest,, the food marketing system has a strong incentive to 
increase the service component of the products they sell. In fact, the 
marketing service component is their primary product. 

Finally, a few words on the statistical technique used to measure 
changes in the overall price of food. Just because the CPI for food 
increases by 6 percent in one year it does not mean that Americans ac- 
tually pay 6 percent more for food. The CPI is currently based on the 
1960-61 purchasing behavior of urban clerical workers and wage 
earners. The index, therefore, may not reflect either the purchasing 
behavior of the population who are not urban clerical workers or wage 
earners or, more importantly, any adjustment consumers make as a 
result of changes in preferences or prices. 

A REVIEW OF 19 7 7 

Food prices at retail were impacted most by weather, imported food 
prices, marketing costs and consumer demand. Much has already been 
said during this conference about weather but the severe winter which 
devastated Florida's vegetables and severely damaged their citrus 
crops contributed significantly to the food price rise. Imported food 
prices were also influenced dramatically by the weather. The coffee 
shortage, in particular, is noted although a number of other items have 
had sharp increases too. Costs of marketing services continued to rise 



116 



and were either passed on to consumers through higher prices or were 
partially offset by lower prices of farm commodities. Again this year, 
the consumer demand for food and related services has been strength- 
ened by increased disposable and real income. 

We experienced relatively stable retail food prices in 1976. But 
prices began to climb early in 1977. Through July an average rise 
of 1 percent per month had occurred. Winter vegetables and citrus 
were contributors but most of the increase resulted from the dramatic 
increases in prices of imported foods, particularly coffee, and fish. By 
mid-1977 prices for food at home were up 7% percent from December 
with the all- food index, which includes prices of food away from 
home, up 7.2 percent. 

In the second half, larger supplies of farm commodities with lower j 
prices to farmers but wider spreads for U.S. farm food should result 
in little change in prices of domestically produced food. Coffee prices 
will be down 7 to 8 percent, but prices of other imported foods and 
fish continue to increase in the second half. We estimate that prices 
for food at home will be about 1 percent higher at the end of Decem- 
ber than at mid-year; prices for all food will be slightly higher. 

For 1977, grocery prices will probably end the year at a 7 percent 
higher level than a year earlier and average over the whole year about 
6 percent above 1976. 

Price increases for away-from-home eating, which are influenced 
more by rising consumer demand and by increases in costs in the non- 
farm sector are estimated to be up 8 percent over 1976 on the aver- 
age — a slightly larger increase than a year ago. 

The all-food index combining both at-home and away-from-home 
components will average about 6% percent above 1976. 

Another perspective on the behavior of retail food prices can be 
obtained by an examination of a market basket of domestically pro- 
duced food. The market basket contains 65 food items and represents 
the average quantities of domestic farm-originated foods bought in 
retail stores during a year by an urban household. It does not include 
foods consumer buy in away-from-home eating establishments, fish- 
ery products, and imported foods such as coffee, tea, cocoa, and 
bananas. 

The retail cost of the market basket of U.S. farm foods will aver- 
age only about 2y 2 percent higher this year following the 1 percent 
rise in 1976. Although prices at the farm level have been higher for 
some commodities, average returns to farmers for all market basket 
foods will be slightly below last year. Price spreads, the difference 
between what the farmer receives and what the consumer pays, will, 
however, average about 41/2 percent higher for the year, reflecting 
lags in adjustments between farm and retail prices and rising costs 
for labor and other marketing-related inputs. Thus/ all of the 1977 
increase in the retail cost of our market basket of foods produced on 
U.S. farms arise from wider price spreads which reflect higher mar- 
keting charges. 

Although the retail price of the market basket will increase moder- 
ately in 1077. some components of it will show substantial variations 
in price behavior. Retail prices will average sharply higher for 
fresh fruits and vegetables (14 percent) and oilseed products (10 per- 



117 



cent) reflecting tight supplies and higher farm prices for these com- 
modities earlier this year and widening price spreads in recent months. 
Small to moderate price increases for cereal and bakery products 
(iy 2 percent), processed fruits and vegetables (3 percent), and other 
highly processed foods are wholly attributable to higher marketing 
charges. Returns to farmers producing the major raw material in 
these products have been generally lower this year. 

Increases in spreads for many crop products followed sharp 
decreases in prices to farmers as retail prices were slow to adjust. 
For example, the price spread for fats and oils products increased 
25 percent from the second to the third quarters following the sharp 
drop in oilseed prices last spring. Despite sharply lower prices for 
wheat, retail prices for cereal and bakery products are up 1% per- 
cent reflecting wider price spreads. Fresh fruits and vegetables price 
spreads which rose to record levels following last winter's weather 
have also been slow to return to their former levels. 

Retail prices for livestock-related products have been more stable 
than crop foods this year. Moderate increases (dy 2 percent) in prices 
of dairy products reflect a combination of higher farm prices for 
milk and wider marketing spreads. Poultry and egg prices will aver- 
age about the same as last year at both the farm and retail level 
despite large fluctations during the year. 

Retail prices for red meats have provided some offset to price 
increases for most other foods in 1977. With a 6 percent decline for 
pork prices and slightly lower prices for beef (down about one-half 
percent) and other meat, retail prices for all red meats will average 
about 2y 2 percent below a year earlier. Returns to farmers for meat 
animals will average about 2 percent lower with a 3 percent reduction 
for marketing spreads also contributing to lower retail prices. 

Fish and imported foods, including coffee, tea, cocoa, and about half 
of the sugar consumed in this country, represent a small proportion 
of all food consumed. In recent years, however, price increases for 
these products have contributed proportionately more to the overall 
increases in retail food costs. In 1974 and early 1975, the world 
shortage caused sugar prices to increase dramatically, but in 1977 
sugar prices are expected to average 10 percent lower than for 1976. 
More recently, coffee has been the major overall price mover, 
although tea, cocoa, and fish prices have also advanced sharply. 
Coffee prices alone will account for about half of the 6 percent rise 
in average grocery prices in 1977. The entire imported foods and fish 
group will contribute over three-fifths of the total. 

Inflationary forces in the economy continue to impact on operating 
costs of food marketing firms. The total cost for marketing farm 
foods is estimated at $124 billion this year, up $8 billion from 1976. 
Prices for labor, packaging, transportation, energy, and most other 
inputs used in the marketing process are all up in 1977. Prices of 
intermediate goods and services purchased by food marketing firms 
will average about 7y 2 percent higher than a year earlier. Prices for 
packaging materials, have increased about 6 percent, while prices for 
energy are up about 20 percent. Rail rates are also somewhat higher 
than last year. 

The largest expense item for food marketing firms in 1977 will be 
direct labor costs. Increases in hourly earnings of food processing, 



118 



wholesaling, and retailing employees slowed slightly to an annual rate f< 

of around 8 percent. Although this is the lowest annual rate of in- I 

crease in 4 years, it exceeds productivity gains and labor costs con- ti 

tinue to exert substantial upward pressure on the farm to retail spreads, n 

Total labor costs for marketing the foods which originate on U.S. b 

farms will actually exceed the farm value of these foods for the first b 

time this year. Labor costs could exceed $58 billon. The farm value A 

will likely remain at about $56 billion — a level maintained since 1974. \ 

Profits in food retailing have been relatively stable during the past I 

year. Profits after taxes for large food retailing corporations in the t 
first half of this year averaged 0.85 percent of total sales, compared 

with 0.80 percent last year. Profits after taxes for these corporations t 

increased from 10.2 percent of stockholder's equity in the first half of \ 

1976 to 11.1 percent in the first half of this year. j 

Profit ratios for food manufacturers were down slightly during the i 

first half of this year. The second quarter profit/sales ratio of 3% 1 

percent was down from 3.7 percent a year ago. Equity profits for these I 
firms were also lower — 15 percent compared with 16.4 in the second 

quarter of 1976. i 

OUTLOOK FOR 19 78 

As indicated initially, the food outlook for 1978 is dominated by an- 
ticipated large food supplies (both domestic and foreign), increases in 
marketing costs, some uncertainty about the weather, energy costs, 
and the impact of recent or pending food legislation. Overall, we ex- 
pect that food price increases in 1978 will be about the same as 1977 or 
slightly lower. 

World grain output for the 1977-78 crop-year is below last year 
and total world usage will be higher because of population pressures 
and economic growth. Despite the record U.S. crop, total world pro- 
duction is expected to be below utilization by only 4 to 6 million tons. 
U.S. farm production will, however, be sufficient to meet the antici- 
pated export requirements and still provide an adequate supply of 
major crop commodities for domestic use. 

Processed fruits and vegetables, are also expected to be adequate 
through mid-1978, largely as a result of this year's large crop harvests. 
The availability of many fresh produce items will be dependent on 
weather conditions at critical times during the growing season. 

With large feed supplies available and feed prices at relatively low 
levels, larger supplies of pork, grain-fed beef, poultry, eggs, and dairy 
products are anticipated next year. Although total beef output may be 
down slightly (if, as expected, cattle producers reduce the number of 
nonfed animals sent to slaughter) the per capita availability of all 
animal food products combined will match or slightly exceed the 
record high levels of 1976 and 1977. 

Rising wages of food processing and marketing employees and prices 
of other inputs purchased by food marketing firms will continue to 
exert upward pressure on food prices during 1978. Wages of employees 
in the food industry will probably increase 7 to 8 percent in 1978 as a 
result of prior wage settlements, cost-of-living adjustments to wages, 
renegotiated wage agreements and increases in the minimum wage. 

In 1978, major collective bargaining agreements covering about a 
quarter million food marketing workers will expire, mostly for retail 



119 



food store employees. Although, only one worker in nine is included in 
major collective bargaining agreements, these agreements have poten- 
tially far-reaching effects on the food industry since wages of non- 
union and management employees tend to follow changes in collective 
bargaining agreements. New wage settlements in the coming year will 
be strongly influenced by attempts to protect workers from further in- 
flation and the possible loss of purchasing power. In addition to the 
provisions of labor contracts, increases in the minimum wage to 82.65 
per hour and higher social security withholding rates will also increase 
the labor costs of marketing firms. 

Labor productivity should continue to increase slightly next year due 
to the greater volume of food marketed and help offset increases in 
wages and other cost elements. Productivity gains are likely to be 
greater in food processing than in food retailing. Productivity growth 
in food stores has been slowed by a loss of business to eating places, 
longer hours of operation, and the growth of service-oriented opera- 
tions in supermarkets, such as bakery shops and delicatessens. 

Higher prices for other services, such as energy, packaging materials, 
and transportation will also contribute to rising marketing costs in 
1978. The stable railroad freight rate situation for both food products 
and farm products that prevailed for much of 1077 ended this fall. Rail 
rates during 1978 are expected to average 6 to 7 percent above 1977 
levels. Rates charged by trucks and barges are also anticipated to rise 
commensurately. 

Pending legislation and international oil prices introduce consider- 
able uncertainty into the energy situation. However, it appears almost 
certain that the general upward trend in these prices will continue in 
1978. Increases in natural gas prices of 10 to 20 percent may result from 
proposed changes in the regulation of prices. Electric power rates can 
be expected to increase because of the cost of the required conversion 
of many steam-generating plants from fuel oil and natural gas to coal. 
The generally rising prices for all forms of energy will also exert some 
upward pressure on electric power rates. 

Domestic demand for food is expected to continue to expand in 1978 
at about the same rate as this year. In addition to the anticipated small 
increases in the population, disposable personal income is expected to 
increase about 9 percent, nearly identical to the 1977 increase. The 
overall inflation rate is likely to be about the same as in 1977. Real con- 
sumer income therefore, would increase by about 3 percent. However, 
demand expansion for automobiles, housing, and services will continue 
to absorb most of the overall increase in consumer income, thus mod- 
erating its impact on food demand and prices. 

Producer response to new farm legislation and the recent interna- 
tional trade developments represent uncertainties which could impact 
on food prices in 1978 even if weather is good. There is, however, 
little doubt that the recently adopted sugar program will influence 
U.S. food prices. 

Anticipated developments in the regulation of food safety and com- 
position will also bring about changes in food marketing costs. Saccha- 
rin appears to be on the way out as a food additive — just when we 
cannot tell — creating adjustment problems for consumers, as well as 
food manufacturers. The use of antibiotics and growth stimulants by 



120 



livestock and poultry producers is being questioned and may be 
prohibited. 

Finally i the technique for measuring price increases will be changed 
in 1978. The Bureau of Labor Statistics has updated the way it will 
calculate the CPI. Food will be less important in the new index so that 
fluctuations in food prices will impact less significantly on the overall 
CPI. The composition of the food index will also be changed. In par- 
ticular, the base weights will be adjusted to reflect consumer purchas- 
ing patterns for a more recent time period — July 1972 through June 
1074. Just what these changes will mean for official reports of food 
price changes is still uncertain. 

SUMMARY 

\Ve have talked about the three basic sources that contribute to 
changes in retail food prices — the raw product sector, the marketing 
sector, and the forces of consumer demand. In 1978 it appears that 
most of the pressure on food prices will be derived from increased costs 
in the marketing sector, and relatively less from imported foods and 
fish than in 1977. As in recent years the farm value of domestically 
produced foods will be relatively stable meaning that the farm sector 
will continue to retard retail food cost increases and general price in- 
flation. Under these conditions, average increases in grocery store food 
prices will likely be in the neighborhood of 1 or 2 percent each quarter 
through mid-1978 reflecting normal seasonal patterns for farm prices 
and continued upward push from marketing costs. We expect the av- 
erage increase in grocery store food prices for all of 1978 to be 4 to 6 
percent. 

TABLE 1.— FOOD EXPENDITURE COMPONENTS, 1967-77 
[In billions of dollars] 

Forecast 



Item 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 

Personal consumption 
expenditures for food 

and beverage i 109.6 118.3 126.1 136.3 140.6 150.4 168.1 189.9 209.5 225.5 241.0 253.0 

Less alcohol 14.6 15.6 16.6 17.7 18.6 19.8 21.3 23.0 24.7 26.0 28.0 29.0 

PCE for food 95.0 102.7 109.5 118.6 122.0 130.6 146.8 166.9 184.8 199.5 213.0 22A.O 

U.S. farm food 

expenditures* 90.3 94.0 97.8 106.0 110.8 117.9 135.3 149.2 161.4 173.2 180.0 188.3 

Farm value 28.8 30.4 33.7 34.8 35.3 39.3 51.1 56.0 54.9 56.3 56.0 56.5 

Marketing bill 61.4 63.6 64.1 71.2 75.4 78.5 84.2 93.2 106.5 116.0 124.0 131.5 

Labor 25.9 28.0 30.4 32.3 34.5 37.6 40.6 44.8 49.1 54.3 58.8 62.5 

Packaging 7.2 7.8 8.0 9.1 9.7 10.2 10.9 12.1 14.2 15.8 16.9 18.1 

Transportation 4.3 4.5 4.6 5.2 6.0 6.1 6.1 7.3 8.5 9.5 10.4 

Other 24.0 23.3 21.1 24.6 25.2 24.6 26.6 29.0 34.7 36.4 37.9 

1 Department of Commerce, Bureau of Economic Analysis. These estimates of food expenditures differ in several respects 
from FRS estimates of expenditures for farm foods. The BFA estimates of all food include the value of imported foods, 
•,ea'oods, food furnished military personnel, and food consumed on farms where produced, but the ERS estimates exclude 
these items. However, the BEA estimates exclude the value of food furnished hospital patients, students in boarding 
schools, and inmates of institutions, food furnished by Government agencies to schools and needy persons, food purchased 
as a business expense, and the value of food served by airlines to their passengers, which the ERS estimates include. 

i USDA ERS. 



121 



TABLE 2.— EXPENDITURES FOR FOOD VALUED AT RETAIL STORE PRICES, 1954-76 



Food away from home 

Food 



at home Households 1 Households 1 Total 2 

(millions) (millions) Total 2 (percent) (percent) 



1954 


$43,965 


$7, 331 


511,572 


14.3 


20.8 


1955..... 


45, 221 


7, 587 


11,703 


14.4 


20.6 


1956 


46, 762 


7. 984 


12,110 


14.6 


20.6 


1957 


49. 645 


8, 348 


12, 633 


14.4 


20.3 


1958 


51,641 


8, 571 


13, 027 


14.3 


20.2 






8, 724 


13, 126 


14.4 


20.2 


1960 


52, 953 


8, 978 


13, 477 


14.5 


20.3 


1961 


53, 434 


9,212 


13. 833 


14.7 


20.6 


1962 


54, 429 


9,615 


14, 396 


15.0 


20.9 


1963 


54, 738 


10,010 


14, 891 


15.5 


21.4 


1964 


57, 030 


10, 572 


15, 731 


15.6 


21.6 


1965 


59, 950 


11,710 


17,371 


16.3 


22.5 


1966 


63, 030 


12, 570 


18, 943 


16.6 


23.1 


1967. 


63, 060 


12, 425 


19, 197 


16.5 


23.3 


1968 


66, 668 


13,236 


20,617 


16.6 


23.6 


1969 


70, 862 


13, 737 


21,837 


16.2 


23.6 


1970 


76, 500 


14,416 


23, 176 


15.9 


23.3 


1971 


81, 183 


14, 978 


24, 300 


15.6 


23.0 


1972 


87, 203 


16, 289 


26, 769 


15.7 


23.5 


1973 


99, 145 


20, 321 


33, 329 


17.0 


25.2 


1974 


114,079 


22, 775 


37,719 


16.6 


24.9 


1975 


126, 594 


26, 045 


42, 826 


17.1 


25.3 


1976 3 


136, 779 


27, 975 


45, 926 


17.0 


25.2 



1 Food away-from-home eaten and paid for by persons living in housekeeping households, valued at retail foodstores 
prices. 

- All food-away-from-home including expense account meals, institutional and military food service, hospital and airline 
meals, etc., valued at foodstore prices. 

2 Preliminary. 



RETAIL FOOD PRICES 1 



% 0P 1967 



20Q - 



175 - 



-UWI4I III lllllllllllll mm, ,,,,,, 



150 



125 - 



100 



_ 1974 

1975 

..... 1976 
._. 1977 







JflN 



J I I I I I I I 1 J 

RPR JUL OCT 



"FOOD fiT HOttE. SOURCE: BUREAU OF LABOR STATISTICS 



NOVEMBER 1977 



Figure 1 



122 









CONSUMER PRICE INDEX 
ALL ITEMS AND TOTAL 


FOOD 


7. OF 1967 








_RLL ITEMS 
i. TOTflL FCCO 






180 


* ° 


miiiM ,|,, *" M ~ 




150 








140 








120 








100 ■ 


, ! . ! . 1 , 1 , ! , 1 . ! . 1 . 1 . 1 . 1 . 




1972 1973 1974 1975 
source: burenj gf labor statistics. 


1976 1977 


USOA 




NOVEMBER 1977 


FlGUBE 2 



123 



FOOD PRICES 



% OF 1357 

Jm-m WHOLESALE 
......... RETAIL* 




1QQ L-j J — till i L i 1 i 1 i 1 i 1 i 1 i I— i I i 

1972 1973 1974 1975 1975 1977 

■source: BUREAU OP LftBOR statistics. 
♦PRICES RECEIVED FOR FOOD 0RI8IMfiTIN8 ON U.S. PARAS. 

USDA NOVEMBER 1977 



Figure 3 



MAJOR COMPONENTS OF CP! - FOR ALL FOODS 




220 



170 



Imports and Fish 



U.S. Farm Food 
X 



ll in 
1976 



II III IV 

1977 

* FORECAST 



1 



1978 



NOVEMBER 1977 



Figure 4 



9S-72: 



124 



PER CAPITA FOOD CONSUMPTION 1 



% OP 1967 



106 - 



mmmm ^ RNIMflL PRODUCTS 

CROP PRODUCTS 

.... ALL FOOD 



H6 




i969 "70 '71 '72 '73 '74 '75 
* ITEMS C0H8INED IN TERMS OF 1957-59 RETRIL PRICES. 
1977 PRELIMINARY 



76 



NOVEMBER 1977 



Figure 5 



125 



PER CAPITA CONSUMPTION OF 
LIVESTOCK PRODUCTS* 



110 »- 



105 - 



100 



90 



USDA 



I I I I 1 I 1 I 1 I I I 1 I I 




-x-J i ! . 1 



1972 1973 1974 1975 1976 

nITEfl COMBINED IN TERMS OF 1957-59 RETAIL PRICES. 
1976 PRELIMINARY. 



1977 



NOVEMBER 19: 



Figure 6 



CONTRIBUTION OF COMPONENTS 

TO INCREASES IN FOOD STORE PRICES 

% CHANGE IN RETAIL PRICE 
20 



15 - 



10 



4 5 



Food At Home ^ 
Toial 



16 3 



* Farm Value 



\\. Fish and lni| 
Marketing* 



Imports 



Spreads 



III 



-5 L 

1972 1973 1974 1975 1976 1977 1978 

* FOOD AT HOME INDEX. BLS 1977 AND 1978 FORECASTED. 

* MARKET BASKET OF FOODS FROM U S FARMS. 

USDA/ERS NOVEMBER 1977 



Figure 7 



126 



CONTRIBUTION OF COMPONENTS OF FISH AND IMPORTED 
FOODS, TO INCREASES IN FOOD STORE PRICES 



% CHANGE IN RETAIL PRICE 
5f 



-1 «- 

1972 1973 

* LESS THAN 05 PERCENT. 
•USDA/ERS 



Fish and imported foods 
'! Total 




1974 1975 

1977 FORECASTED. 



1976 



1977 



1978 



NOVEMBER 1977 



Figure 8 



CONTRIBUTION OF FARM VALUE 

TO INCREASE IN FOOD STORE PRICES 

% CHANGE IN RETAIL PRICE * 

12f~" r«i 



10 



8 



H 

I 



Farm value 
Total 



f 



1972 



3 



1973 



1974 



1975 



17 

1976 



2 



1977 



• NO CHANGE IN 1977 CR0. r 'S a FOOD AT HOME INDEX. ULS 1977 FORECASTED 

FARM VALUE OF MARKET BASKET OF FOODS FROM U S FARMS 

USDA/ERS 



1978 



NOVEMBER 19/7 



FlQDBE 9 



127 



CONTRIBUTION OF MARKETING SPREADS 
TO INCREASE IN FOOD STORE PRICES 



% CHANGE IN RETAIL PRICE A 
10 



34 



.Crop 




2 5 



1972 



1973 



1974 



1975 



1976 



1977 



1978 



A FOOD AT HOME INDEX. BIS FARM RETAIL SPREAD OF MARKET BASKET OF FOODS FROM U S FARMS. 
1977 FORCASTED. 



USDA/ERS 



NOVEMBER 1977 



Figure 10 



U.S. FARM FOODS 



$ BIL 
200 



150 



100 



50 



CONSUMER 
EXPENDITURES 



FARM VALUE LABOR * 



OTHER 
COMPONENTS* 



PACKAGING * TRANS- 

PORTATION 

rrTTTTImTm 



1973 78 73 

1976 Praknwwry 1977/78 



78 73 



78 73 



78 



78 73 78 73 

• Components or total marketing bj 
fuel, promotion, local lor-htf* transportation, insurance, corporate profits NOVEMBER 1977 



Figure 11 



AGRICULTURAL INPUTS, 
FINANCE, AND PRODUCTIVITY 



THE WEATHER— WHAT ABOUT 1978? 



(By Richard E. Felch, Weather Analyst World Food and Agricultural Outlook 
and Situation Board, USDA) 



Looking ahead to 1978, the question "What will the weather be ?" be- 
ll comes very important because weather is the major production input 
which the farmer cannot control. If accurate and timely long-range 
weather forecasts were available, a farmer could make certain ad- 
3 justments to overcome potential weather problems, or at least min- 
ii imize their impacts. However, reliable long-range forecasts of this 
nature are not available, and it will be many years before they are. 

Obviously, there is no way to know what weather patterns will 
prevail next spring and summer. Climatological records tell us what 
\ "normal" weather would be, but it is the year-to-year, or season-to- 
season anomalies that determine the level of production. However, 
it is possible to begin making plans and preparations for 1978, in- 
cluding some adjustments for potential weather impacts. The pur- 
pose of this presentation is to discuss how information about current 
' weather developments, agronomic knowledge, and probabilistic in- 
! formation about weather events can be integrated to draw some con- 
clusions about production prospects for 1978. 

The starting point for evaluating the potential for 1978 is to con- 
sider recent and current weather events. For example, the rainfall 
patterns of recent weeks has helped to determine how much soil mois- 
I ture the corn and soybean crop of 1978 will have available for growth. 
; It has already determined the amount of fieldwork completed in prep- 
aration for spring. It has also determined the condition of the winter 
wheat crop, which in turn will partially impact how well the crop 
stands up to winter conditions. In this agricultural weather system 
there has been a certain amount of "inertia" or momentum already 
in the system. 

The past summer was "mixed" in terms of weather developments. 
' Nearly every part of the country experienced some level of drought 
damage, but overall production was at or near record production 
levels. Soil moisture levels were unusually low in some areas through- 
j out the season, but rainfall was very timely, pulling crops through, 
i The Southeast was one of the hardest hit areas, while pockets of very 
intense drought hit the Corn Belt and Great Plains. 

September and October precipitation has very strikingly reversed 
the drought picture in all areas east of the Rockies. September mois- 
ture was unusually heavy in the Pacific Northwest, the northern 
I Great Plains, the Great Lakes region to the Gulf, and in New Eng- 
I land. October was a month of extremes with very sharp lines between 
areas of extreme wet and very dry. Much of the western Corn Belt 

(131) 



132 



and eastern Plains received over twice normal moisture. In addition 
the area from the Deep South to the Ohio River Valley was also very 
wet. The Middle Atlantic States finally received much needed drought 
relief. Temperatures have generally been mild. 

The result of all this precipitation activity is a soil moisture situa- 
tion which shows conditions to be near to well above normal over most 
of the country. In many areas, excessive wetness has developed to the 
point of having serious implications for 1978, as well as rhe short-term 
implications. 

The situation can be described most easily by the Palmer Index 
map (see fig. 1) which is published monthly in the Weekly Weather 
and Crop Bulletin, a joint publication of the U.S. Departments of 
Commerce and Agriculture. 




Figube 1. — The Palmer Index map for the United States as of October 2S, 1977. 



The Palmer Index is designed to provide a means for evaluating the 
scope, severity, and frequency of prolonged periods of abnormally wet 
or dry weather. It is not always an indication of the current mois- 
ture situation relative to plant requirements, but it is an excellent 
measure of the overall soil moisture situation. It essentially shows the 
overall "hydrologic picture" which can have very important impjiea- 
i ions for agriculture particularly in longer term planning. The Palmer 
Index is also useful because it effectually integrates, the effects of 
the weather over a period of weeks and even months. Positive values 
of the index indicate that the moisture supply, either from current or 
mil ecedent rainfall, exceeded the amount required to sustain soil mois- 
i are levels that would be considered normal for the area. 

Present drought concerns are focused on the Western State-, and in 
particular the water supply outlook for 1978. A third year of below 
normal precipitation would be devastating. Although not a major 



133 




1 Figure 2. — Areas of central United States in which soil profiles are at or above 
field capacity as of October 28, 1977. 

problem at the moment, the southwestern Great Plains is much drier 
than normal. Some problems were encountered, in planting winter 
I wheat because of the dryness. This area will bear close watching dur- 
ing the w inter and early spring months. 

On the other hand, the moisture situation is adequate to excessive 
over large areas of the United States from the Plains eastward. The 
'situation has potential implications for 1978 which could be very seri- 
ous. Figure 2 outlines the area where soils are already at or above field 
capacity (based on Palmer Index program computations) over the 
central United States as of October 28, 1977. Unusually heavy precipi- 
tation has continued the past 2 weeks making figure 2 conservative. 

The very wet weather of this fall has produced conditions as wet 
or wetter than the fall of 1973. In that particular year the following 
winter and spring were very wet, record flooding occurred along the 
Mississippi River and most corn and soybean crops were planted very 
late. This delayed the crops which were stressed by extreme summer 
dryness and an early frost. This does not mean the situation will re- 
peat itself in 1978 ! 

The general moisture situation as it exists across the central United 
States can be described as adequate to excessive. What changes might 



134 



be expected in the situation over the next few months ? Moisture loss 
is normally minimal during the winter months, particularly in north- 
ern and central areas. Moisture can be lost through runoff, drainage 
or percolation, and evaporation from the surface. Both percolation and 
evaporation are reduced by cooler temperatures and there is little 
water use by vegetation. Once the ground freezes the water is trapped 
as ice and held until the spring thaw occurs. At the same time, very 
little winter moisture can penetrate the soil. 

Under typical conditions for our major grain producing areas, 
when the ground finally opens up in the spring, there is still some soil 
capacity to absorb additional moisture. Typically, by the time plant- 
ing season rolls around in the Corn Belt soil profiles are full. In 1978, 
soil profiles will still be nearly saturated at the time that the soils 
open up. Springtime moisture would typically maintain these satu- 
rated profiles and make spring fieldwork very difficult. This will be 
particularly important because the amount of fieldwork completed 
this fall lagged normal. 

In addition, the warm, open fall so far will keep soils open for some 
time to come, so the area with excessive moisture in figure 2 may ex- 1 
pand further, particularly if present weather patterns persist. 

With this information, it is possible to draw some conclusions about 
production problems which could occur in 1978. The discussion will be 
limited to wheat, corn, and soybeans. 

WINTER WHEAT 

The eastern portions of the Wheat Belt are well above normal in 
moisture and crop growth is well advanced. Some damage may have 
occurred because of excessive moisture. Root growth may be stunted. 
Dry areas in western Plains must also be watched carefully. Given the 
abundant moisture supply, conditions will be excellent for growth 
when the crop breaks dormancy this coming spring. Given no addi- 
tional moisture, moisture is sufficient to carry the crop through the 
major growth of the crop. Only one or two good rains would provide 
the moisture to carry the crop to maturity. 

Excessive moisture could make the crop more vulnerable to winter- 
killing, if conditions turn extremely cold and dry. Heavier soils would 
experience some heaving, exposing the plant roots. 

Overall prospects for winter wheat are good. 

SPRING WHEAT 

The primary spring wheat areas generally have normal to above 
normal moisture. Soil moisture conditions should not cause any major 
difficulty to field work and seeding. However, moisture must be at least 
normal or above during spring and early summer. 

CORN" 

Current moisture conditions are such that the probability of some 
delays in spring field work and planting is reasonably high. 

Normal or above normal rainfall in the areas indicated in figure 2 
would result in significant nominal delays in planting. The probability 



135 



pi receiving this amount of moisture is approximately 40 percent. A 
warm, relatively dry April would be extremely beneficial. This would 
allow soils to dry sufficiently to allow preparation of fields and plant- 
ing. This would also allow the surface soils to warm up quickly. Wet 
(soils tend to remain cold. With the current situation, even normal 
jmoisture would cause some problems. Today's equipment will allow 
planting of the entire corn crop within 2 weeks if necessary, but they 
require drained soils. However, if delayed be}^ond, May 10, the general 
rule of thumb is that yields are reduced about 1 bushel a day. Cold wet 
jweather during or after planting also reduces or slows germination and 
enhances diseases and weed problems. 

Given that the crop is planted with minimal difficulty, the excellent 
soil moisture which exists is in direct contrast to the past year and 
[moisture will not be as critical because most soils will have considerable 
moisture to carry the crop through the first few weeks of growth. How- 
ever, the critical period is the reproduction phase and moisture sup- 
plies must be ample at that time. 

SOYBEANS 

Any delay in corn planting would also be reflected in soybean plant- 
ings since soybeans are normally planted after corn. Soybeans would 
not be affected as greatly by late planting, although any delays pushes 
the reproductive period into the hotter, drier parts of late July and 
: August. 



THE WINTEK OUTLOOK AXD THE LIMITATIONS OF 
LOXG-KANGE WEATHER FORECASTING 



(By Donald L. Gilman, 1 Chief of the Long Range Prediction Group, National 

Weather Service NOAA) 



Long-range weather predictions for 2 weeks or more ahead are 
quite different from short-range forecasts for tomorrow or the next 
5 days. The familiar daily weather forecasts are based on a variety of 
applications of physical laws and a nearly continuous mapping of 
temperature, wind, moisture, and pressure fields at the Earth's surface 
and at several levels in the upper atmosphere. Much of the mapping 
is done at the National Meteorological Center of the National Weather 
Service here in the Washington area where large computers rapidly 
process detailed weather measurements made hourly, every 6 hours, 
or every 12 hours depending on the type of observation. The computers 
programed with complex mathematical models of atmospheric mo- 
tions, produce outputs that include various types of prognostic weather 
maps. Such maps are basic tools used by Government and private 
forecasters across the Nation. 

The science of meteorology has progressed to a point where there is 
skill in temperature predictions on a day-to-day basis up to 5 days 
ahead. The Weather Service produces such 5-day forecasts daily on an 
operational basis. We plan to begin producing forecasts of the aver- 
age temperature between 6 and 10 days ahead on a scheduled but 
strictly experimental basis in the next few months. We are optimistic 
that we can demonstrate some skill in supplementing short-range tem- 
perature forecasts this way because results of research at NOAA's 
Geophysical Fluid Dynamics Laboratory, the Massachusetts Institute 
of Technology and elsewhere have indicated that there is a scientific 
basis for such an attempt, and early tests have been favorable. 

The limit of scientific predictability of daily weather variations is 
not precisely known, but evidence strongly suggests that the limit may 
be on the order of 2 or 3 weeks. In other words, the best scientific 
evidence indicates it will never be possible to predict day-to-day 
weather changes a month or more in advance. We are able, however, 
to provide predictions of average conditions over periods of a month 
or more, and there is no known limit as to how far in advance this 
may someday be done. The skill of these predictions now is very I 
limited and depends strongly on the forecaster's experience and judg- 
ment and on various empirical techniques, including some formal sta- 
tistical methods. Physical concepts play a role in shaping these tech- 



1 The views expressed In this paper are those of the author nnd not necessarily those of 
the USD A. 

(130) 



137 



niques. but there is no quantitative theory of long-range forecasting — 
nor have the computational models of the atmosphere that provide 
the backbone of day-to-day forecasting been shown to be extendable 
beyond 10 days. 

The most common span of a long-range prediction is a month ; the 
Weather Service has been issuing temperature and precipitation out- 
looks of this kind for 30 years. Four years ago, after 15 years of 
internal experimental trials, the Weather Service began official release 
of 3-month, or seasonal, temperature outlooks. The lead time that can 
be given with these official outlooks is short : 2 or 3 days before the 
beginning of a month ; 5 or 6 days before the beginning of a season. 
Only the simplest characteristics of the weather for the period can be 
stated : average temperature, total precipitation. Xeither the occur- 
rence of outstanding events during the period, nor their timing, nor 
even general trends of change have proved to be predictable. The 
forecasts are stated quantitatively, but only within a few broad, general 
classes whose limits are numerically defined. 

The prediction process has two stages. First the forecaster must 
sketch an average upper-air circulation pattern for the Northern 
Hemisphere's temperate and Arctic latitude zones, showing its ex- 
pected abnormalities. Second, from the upper-air chart the forecaster 
then infers the surface weather anomalies that should be produced by 
such a pattern. The first step is the harder of the two. To accomplish 
it, the forecaster studies the evolution of the changes in circulation 
over the recent months, displayed on a sequence of time-average charts : 
monthly, bi-weekly, 5-day. Some of these changes can be extrapolated 
cautiously into the future. Many can be shown to lead to mutually 
inconsistent outcomes in dilferent parts of the hemisphere. The incon- 
sistencies may be resolved by appealing to statistics showing which 
abnormalities of the circulation tend to persist or to disappear, at 
what times of the year, and at what places. Or they may be resolved 
by looking for evidence of a sudden change in the number or location 
of the wide meanders in the hemispheric current or westerly winds 
aloft. These meanders guide the prevailing motions of storms and 
fronts. 

Monthly and seasonal temperature outlooks made by these methods 
typically have an accuracy of about 60 to 65 percent ; that is. they will 
turn out on the predicted side of the official 30-year normal a little 
over 6 times out of 10; whereas a coin-flip will do it about 5 times. 
Monthly rainfall forecasts typically score between 50 to 60 percent in 
the same terms. Outlooks of this modest level of skill will help only 
certain kinds of users who can make subtle adjustments in their 
activities and still profit. However, the cost of the service is also at a 
modest level, being but a small fraction of one percent of the Weather 
Service budget and staff. Most numerous among the subscribers are 
government officials, agricultural producers and marketers, fuel dis- 
tributors, and assorted commercial firms. 

The monthly outlooks are updated every 15 days and the seasonal 
temperature outlooks are prepared and published every 90 days, with 
experimental updates every 30 days. 

Now I wish to turn to questions of recent seasonal weather. Last 
winter generally was the coldest winter for the Eastern United States 



138 



since the winter of 1917-1918 : and it followed a cold fall also unprec- 
edented since 1917. The severity of these two seasons was associated 
with a marked and unusually persistent interruption of prevailing- 
westerly winds across North America. Over the Eastern Pacific Ocean, 
prevailing winds aloft from early fall to late winter were diverted 
northward to Alaska. The return flow around a persistent ridge of 
high pressure in the western parts of the United States and Canada 
swept southward down across central Canada and penetrated deep 
into the Southern United States. The result was record warmth in 
Anchorage, record cold in Miami, and the failure of winter storms 
to reach the West Coast and replenish the mountain snowpacks of the 
West. 

The abnormalities of the upper-wind patterns, while exceptionally 
strong and long-lasting, were by no means atypical in their general 
pattern. Although some interesting hypotheses have been advanced, 
we know of no demonstrated explanation for the intensity or persist- 
ence of these anomalies, nor does it seem likely that there is any simple 
or single explanation. Temporary equilibrium in a complex physical 
system generally involves a multitude of factors, none of which may 
be clearly dominant. 

Although deep physical insight in diagnosing and forecasting re- 
mains out of reach, enough empirical evidence was available to make 
successful general statements about fall and winter in 1976-77. The 
Weather Service's temperature outlook for last winter was issued on 
schedule in late November 1976 and called for below normal tempera- 
ture over most of the Eastern United States, as had its fall outlook. 
Quite similar predictions for the winter were made by scientists at 
the Scripps Institution of Oceanography and the Woods Hole Oceano- 
graphic Institution. 

Winters generally vary quite irregularly from year to year. Long- 
term trends, tendencies to resemble the previous year, and other simple 
types of regularity account for only a small part of these variations. 
One can reasonably say, therefore, that the climatic odds against the 
recurrence in 1977-78 of a similar and equally severe winter pattern 
must be rather long, nearly as long as those against the original occur- 
rence. We would set them at more than 30 to 1. Can anything be added 
in the way of an explicit forecast ? 

In September we undertook a first, very preliminary, look toward 
the coming winter, based on the regional anomalies of the hemispheric 
upper-wind patterns of this summer, last spring, and the last two 
winters and the statistics of their likely carryover effects into the 
winter. The scattered clues we found pointed toward a national tem- 
perature pattern in which the northeastern quarter of the country and 
the Central Mississippi Valley seemed the most likely to experience a 
colder winter than normal, and the Southwestern quarter most likely 
to enjoy a mild one. This tentative picture, which should not be given 
more than a 55 percent chance of verifying at any individual city, 
will be superseded on November 28 by our regular winter outlook. In 
the preparation of that final outlook, the hemispheric upper-wind 
patterns of the autumn months will be the important new ingredients. 

Until the final winter outlook (covering December through Febru- 
ary) is ready, the closest approximation to it is an experimental 90-day 



139 



temperature outlook for the period November through January, shown 
on the accompanying chart. It differs from the preliminary view of two 
months ago mainly in adding warm conditions in the Xorthwest and 
removing them from the Southern Great Plains. 

OUTLOOK FOR 90-DAY AVERAGE TEMPERATURES 
November 1977 through January 1978 




Indeterminate, equal odds for warm or cold 



"Normal" refers to the average temperature of the years 1941-70. The odds 
cited in this experimental outlook have been shortened slightly from those that 
can be quoted for our regular calendar season outlooks. 

NOAA, National Weather Service 
Long Range Prediction Group 



98-723—77 10 



CLIMATE CHANGE S — A COMMENTARY 



(Bv William Gasser, Agricultural Economist, Economic Research Service, 

USDA) 



There has been much discussion in the last few years about possible 
future weather patterns that may be unfavorable for agriculture. 
Most present short-run forecasts and long-range projections of world 
crop production do not incorporate possible future changes in climate. 
There has been criticism of the Department of Agriculture and others 
for assuming normal weather in projections of future crop production. 

If the basic structure underlying weather is assumed to be constant, 
the impact of weather could be measured through statistical analysis 
of historic temperature and rainfall data, and its relation to agricul- 
tural production data. However, this approach ignores contentions 
that the basic climate factors underlying weather are changing, and 
that our data series are not long enough or comprehensive enough to 
identify long-run weather cycles. We in ERS are currently working 
on both the statistical analysis of historical data, as well as the broader 
question of long-run climatic change. 

We have attempted to isolate "weather-related" variations in grain 
yields using standard regression techniques to factor out the effects 
of changes in physical resources, the quantity and quality of inputs, 
and improvements in technology. The variations in grain yields un- 
explained by this process of elimination are assumed to be the effect 
of deviations in weather from normal or mean levels. Combining these 
weather-related variations in yields with area data translates yield 
variations into production variations. Annual variations in total grain 
production have generally ranged within 2 percent and have never 
exceeded 6 percent during the period covered by our data. The netting 
out of positive and negative deviations in different regions at the 
world level in any one year, hoAvever, understates the impact of 
weather within regions. In the Soviet Union, Oceania, and India the 
year-to-year deviations sometimes exceed 20 percent. 

We are also evaluating the possible impacts of long-run climatic 
changes, There are several hypotheses about possible change in future 
climates. One is that the cooling trend of recent years will continue. 
Meteorologists seem to be in general agreement that there was a tem- 
perature increase from the 1880's to the 1940's (about 0.6 degrees 
Celsius in the Northern Hemisphere, with the largest increases in 
noil hern latitudes). But since the 1940's, temperatures have declined, 
although there is some evidence of a leveling off in recent years. 

Another hypothesis is that a warming trend soon will begin — if it 
has not already started — as a result of the so-called "greenhouse" 
effect of carbon dioxide accumulation. Only about one-half of the 
carbon dioxide from human activity (primarily from burning fossil 

(140) 



141 



fuels) leaves the atmosphere. The rest accumulates, permitting solar 
radiation to enter our atmosphere, but trapping the longer-wave out- 
going radiation. Some scientists forsee a rise of one or two degrees 
Celsius over the next few decades if use of coal, gas, and oil continues 
to increase at recent rates. A result of such a warming trend would 
likely be shifts in temperature and rainfall patterns, but the impact 
on agriculture and other sectors of the economy has not been well 
quantified. 

Another hvpothesis relates to sunspot cycles, for which an apparent 
double cvcle^ periodicity of 20-22 years has been identified. There is 
speculation that the double cycle "is related to drought in the U.S. 
High Plains and that another major drought may be "due." Thus 
far, there is no agreed-upon physical explanation of how sunspot 
cycles could affect the weather of the High Plains, and most of the 
world's droughts do not seem to show a recognizable recurrence 
pattern. 

Another major issue relates to variability of weather — probably a 
more important issue than cooling or warming trends over the next 
quarter century. There is some evidence of a low level of variability 
in recent years, especially in the United States. Some scientists con- 
tend that higher variability should be expected in the future. If so, 
this could mean greater fluctuation in crop output — with obvious im- 
plications for grain reserve programs, export sales, foreign aid pro- 
grams, etc. Increased variability could also complicate crop breeding 
programs — the need to breed for a wider range of temperature and 
precipitation conditions. 

What can be done when confronted by such conflicting theories? 
The very fact of controversy among the leading authorities indicates 
that science doesn't know with certainty the cause of global climate 
changes. There are no comprehensive theories, suitable models, or 
sufficient actuarial experience to answer adequately the questions or 
supply the information needs of national policymakers. Research may 
help in the future, but we need the best possible answers now. We have 
decided to pursue the alternative of listening to expert judgments — 
a plea many of the experts have been making. But then the experts 
have an obligation to speak in more than vague generalities — which 
at one time might have been appropriate to create awareness of the 
problems. What is needed now are expert judgment forecasts — sub- 
jective though they necessarily must be — on some of the controversial 
issues relating to possible changes in climate and its variability, and 
how such changes might impact on agriculture or other sectors of the 
economy. In general, it's not very useful to tell a policymaker that 
since some unfavorable event has happened in the past it can happen 
again. An informed, expert judgment on the likelihood, or the odds 
for a repetition of the event would be much more useful to the de- 
cisionmaker weighing the costs, benefits, and risks of alternative 
policies. 

It's against this background that a novel research project is now 
underway in the Research Directorate of the National Defense Uni- 
versity, Fort McNair, Washington, D.C. The project is a joint effort 
of the Department of Agriculture, the Department of Defense, and 
the National Oceanic and Atmospheric Administration. In detailed 



142 



consultation with the experts, we hope to elicit best judgments on the 
probabilities of changes in climate and its variability and the re- 
sultant effects on U.S. and world food production and on other related 
issues affecting national policy to the year 2000. 

We sent out to a panel of climate experts a set of questions dealing 
with significant climatic factors, including variability. We tried to 
identify weather developments which some experts have said may 
occur and which may significantly affect world food production, and to 
frame precise questions about such developments. The time span 
covered by our queries runs to the end of this century. We asked for the 
experts' judgments about climatic changes with their quantitative 
(probabilistic) estimates of the changes. We have analyzed and aggre- 
gated their responses to produce the group's best judgments on these 
matters. An interim report has been prepared and sent out to the panel 
of climatologists for their review and comment before publication of 
the final report in the next month or two. 

The questions we sent out to the panel of climatic experts related to 
global temperature ; temperature by latitudinal bands ; the influence of 
carbon dioxide and turbidity ; precipitation ; precipitation variability : 
midlatitude drought ; Asian monsoons ; Sahel drought ; and length of 
growing season. We asked the experts to assign probabilities of 
changes and to explain the reasons for their answers. On each question 
we asked them to rate their own expertise on the questions and also to 
rank other leading experts. 

I want to stress that we are not attempting to discover scientific 
truth by consensus. We are dependent on experts' judgments because 
science hasn't yet established well-tested theories that permit confident 
predictions about future weather beyond the period of a few days. 
Therefore, we concluded that it was essential that we make the effort 
to find out what the best informed judgments can tell us about those 
weather-climate issues that are most relevant to important public con- 
cerns about the future of agriculture and the world food situation. The 
issues are here now, and decisions must be made on the basis of the best 
information available. As expected, we have found a wide range of 
expert opinions on some climate issues. We are ahead of the game to the 
extent that we have quantified perceptions of climatic change, but we 
are on notice that the current state of knowledge does not permit one to 
make sharp, confident forecasts of certain climate variables. Neverthe- 
less, through this study we hope to achieve a better quantitative under- 
standing of the possible range of agricultural, food, and economic 
situations which depend upon such variables. 

Our preliminary analysis of the responses of the climatic experts 
indicated that judgments about future average global temperatures 
were pivotal in setting the stage for other climatic variables. Using the 
judgments on global temperature changes we have constructed five 
climate scenarios, based on panelists' different perceptions relative to 
likely temperature changes, ranging from "large" global warming to 
"large" global cooling, with temperature ranges and associated prob- 
abilities. The probability for each scenario is essentially a measure of 
the confidence, expressed collectively by the climate panel, that the 
global temperature change between around 1970 and around 2000 will 
lie in the range indicated by the scenario. Conditional probabilities 



143 



with respect to climatic variables other than the overall global tempera- 
ture have been developed and are included in each scenario. 

Panelists whose probability estimates tended toward the moderate or 
large warming scenarios explained their reasoning primarily in terms 
of the likely long-term dominance of the C0 2 warming effect, in rela- 
tion to a possible slow natural cooling. Respondents who leaned toward 
the likelihood of global cooling hypothesized that the warming effects 
of C0 2 might not materialize to the extent suggested by those support- 
ing a strong warming trend or that the C0 2 warming effects would be 
overshadowed by natural long-term, solar-induced climatic cycles lead- 
ing to cooling. The middle scenario — that of little change in the mean 
annual global temperature — is predicated primarily on the warming 
effects of C0 2 balancing the effects of a natural cooling cycle. 

An analysis of the respondents' estimates of likely temperature 
changes by latitudinal bands indicates, as expected, that global tem- 
perature fluctuations tend to be far more pronounced in the polar 
regions than in low latitudes. In other words, the poles are more sensi- 
tive to climate change. A number of the respondents judged that the 
poles may be expected to experience a change at least several fold 
larger than the global average. Several respondents also commented 
that any changes are likely to be somewhat less in the Southern Hemi- 
sphere than in the Xorthern Hemisphere because of the thermal inertia 
provided by the proportionally greater ocean surface. 

An analysis of the respondents' estimates of the probability of 
change in precipitation amounts and variability indicates a high level 
of uncertainty not only with respect to the amount of the change but in 
many cases even with the direction of the change; this is particularly 
true with respect to possible changes in variability from year to year. 
The panelists' responses, however, suggest fairly strong support — 
although by no means unanimous — for the existence of a quasi-20-} T ear 
periodicity in the frequency of drought occurrence in the United States- 
But the causal mechanism of this apparent periodicity was clearly in 
dispute among the panelists. 

We are now prepared to evaluate our climate information in terms 
of possible impacts on world agricultural production. We, in fact, have 
started on this task and are working with another group of experts on 
crop and weather relations to develop an appropriate analytical proce- 
dure. We have set up a panel of crop experts and have asked them to 
evaluate the impact of given temperature and precipitation changes on 
the yields of grains and soybeans in eight countries. 

When the task is done, which we expect to take several months, we 
will have data about possible future grain yields in major producing 
areas of the world which we can then compare with the projections that 
we and others have already made on the basis of assumptions of no 
change in the climate between now and the year 2000. Our analysis will 
growing season. We asked the experts to assign probabilities of changes 
with the probabilities arrived at by our experts, on world grain pro- 
duction, trade, and related issues. We hope to have it all done by 
February. 



OUTLOOK FOR FARM INPUTS 



(By Robert D. Reinsel 1 Program Leader, Economic Research Service, USDA) 



The general tone of the input markets can be characterized as slack 
demand and excess production capacity. These two forces will likely 
result in a much slower rise in prices for most inputs and perhaps 
declining prices for some. 

While input price increases are expected to slow, prices received 
by farmers are not expected to show much strength and farmers, 
particularly those producing crops will be facing a cost price squeeze. 
For 1977, net farm income in current dollars will likely be near 20 
billion and, with the current market situation, income during the first 
half of 1978 is not likely to improve. 

As a result of the less optimistic income picture, lenders can be 
expected to scrutinize loan applications more closely and to be more 
conservative in making loans. This will also impact on the demand 
for operating and capital goods. 

Given the level and outlook for net income, purchases of inter- 
mediate and long-term capital items will likely drop. Purchase of 
short-term production items will slacken modestly but remain stronger 
than purchases of capital inputs. 

I will turn now to the specific outlook for pesticides, energy, farm 
machinery, and fertilizer. 

pesticides 

For 1978, we expect ample supplies of pesticides at slightly higher 
prices. This forecast is based on the following considerations. 

Substantial additions to capacity have been constructed in the past 
several years. This increase permits ample production of nearly all 
types of pesticide materials. In addition, raw materials for producing 
basic pesticide chemicals have been adequate and no shortages are 
anticipated. 

On the price side, low margins at the distributors' level last season 
are reported as a reason for causing several distributors to discontinue 
pesticide, sales. Thus, the remaining distributors can be expected to 
maintain a rather firm commitment to prices that will insure an ade- 
quate margin. 

On the demand side, changes in quanl ity demanded are now largely 
a function of acres of crops grown and the expected set-aside pro- 
gram for feed grains could have a substantial negative impact on 
demand for herbicides. 



1 Contributors of materials include: Patricia Devlin, Paul Andrilenas, Ted Eichers, 
nnd John Mahan. 

(144) 



145 



In addition to basic market forces, regulations continue to be a 
very important factor in pesticide markets. The Environmental Pro- 
tection Agency (EPA) has decided to continue the registration of 
Treflan. This major cotton and soybean herbicide had been under 
review for removal from the market. However, annual benefits to 
farmers have been estimated to exceed the risk of continued use and 
this material will continue to be available. 

A decision to extend the period for reregistration of pesticide 
materials has, at least, provided temporary life for many pesticide 
materials. And, the reregistration process should not affect the avail- 
ability of any product for the coming season. 

In future seasons, such products as toxaphene. lindane, endrin, and 
chlorobenzilate could be removed from the market if presumptions 
against reregistration are not rebutted. 

MACHINERY 

Demand for farm machinery is expected to be very soft next year 
and only minimal price increases resulting from increased costs of 
materials and labor are anticipated. 

Most farmers can be expected to closely review their farm equip- 
ment replacement plans and they will likely replace only those items 
that are absolutely essential for continued operation. 

This expectation is based on observations of the situation for the 
first 8 months of 1977. Sales of all tractors for the January- August 
period were off 3.5 percent from a year earlier. Sales of four-wheel 
drive tractors dropped 24 percent, and for two-wheel drive tractors of 
under 100 horsepower were down 8 percent. Partly offsetting these 
declines were sales of two- wheel drive tractors of more than 100 horse- 
power which increased 11 percent, January through August sales of 
other equipment — combines, cornheads, forage harvesters, mower con- 
ditioners, and manure spreaders were all down ranging from 4 to 21 
percent below last year's levels. 

Although machinery sales were off, prices continued to rise and as 
of June 15, 1977 were up an average of 10 percent over a year earlier. 
Prices of large tractors were up 11 percent and prices for other 
machinery increased 6 to 14 percent. 

In 1978, dealers in farm equipment will be facing a rather difficult 
problem. Much of their supply is already floor planned and they 
will be under heavy pressure to move this equipment out of their lots. 
To do so, many can be expected to raise trade-in allowances on used 
machines and to grant more lenient terms of payment. As a result, 
dealer margins can be expected to decline and if volume also falls 
some of the smaller dealerships may be in serious financial condition. 

With the market for new equipment very soft, dealers can be ex- 
pected to attempt to maintain income by increasing charges for 
machinery repairs, an area where farmers have much less flexibility 
; in postponing necessary service. 

Prices of replacement parts have risen rapidly and the total cost 
of machinery repairs will likely continue to rise sharply in the next 
I year. 



140 



Farm operators would be well advised to schedule known mainte- 
nance needs and work with their dealers in order to avoid additional 
charges for overtime on hasty unscheduled repair operations. 

FERTILIZER 

Lower farm commodity prices and the reintroduction of set-aside 
programs for wheat and a possible set-aside for feed grains will im- 
pact on fertilizer demand in the 1977-78 fertilizer season, causing 
total domestic consumption to remain at or below use in 1976-77. The 
reduced demand and increased production capacity for fertilizer sug- 
gest that prices will be under strong downward pressure into the 
spring season. 

Fertilizer application rates are expected to increase on acres planted, 
but increased application rates will not likely offset the reduction in 
total requirements caused by putting land in the set-aside programs. 

Nitrogen fertilizer 

In 1970-77 farmers used about 10.6 million tons of nitrogen, some 
2 percent more than in the previous year. However, the net suppfy 
including the difference between imports and exports rose by more 
than 8 percent. Inventories of nitrogen materials thus increased 
sharply and nitrogen-fertilizer prices, particularly anhydrous am- 
monia declined, dropping from $188 per ton retail in May to $177 per 
ton in October. At the end of August, nitrogen inventories at the 
manufacturing level approached 2 million tons, about 300,000 tons 
above year earlier levels. From June to the end of August, inventories 
increased by over 600,000 tons, while ammonia prices continued to 
fall. By the beginning of calendar year 1978, ammonia production 
capacity is expected to exceed 23 million tons up nearly 18 percent 
from January 1, 1977. For the 1977-78 fertilizer year, domestic nitro- 
gen consumption is forecast at 10.4 to 10.7 million tons and the net 
domestic supply could reach the 12 million ton mark adding further 
to carryover inventories. 

With such a demand/supply outlook, it seems likely that nitrogen 
]) rices will decline sharply. As prices fall, some manufacturers could 
find it unprofitable to continue operation and what appears to be a 
major oversupply problem could turn into a much more closely 
balanced market. 

Phosphates 

In 1976-77, farmers used over 5.6 million tons of P 2 Q ,. an increase 
of 8 percent over the previous year. Although production increased 
sharply 4 net domestic supply was held to a slower rate of increase by 
an estimated 15 percent increase in exports. Thus, the fertilizer year 
closed with little change in inventory. 

Production increases anticipated for 1977-78 will largely be offset 
by increased exports and net supply mav remain close to 1976-77. 
With consumption estimated at 5.4 to 5.7 million tons, the market 
for phosphates looks much stronger than that for nitrogen and prices 
are exoected to remain stable. 

Potash 

Domestic potash consumption rose 12 percent in 1976-77, with most 
of flic increase made possible by increased imports from Saskatch- 



147 



ewan — nearly 1 million tons of K 2 above the previous year. At the 
end of August potash inventories were slightly below those of a year 
earlier. 

October potash prices remained essentially unchanged from a year 
earlier and no major change is anticipated. 

Consumption for 1977-78 is expected to range between 5.5 and 
5.8 million tons. 

ENERGY 

Energy inputs remain a most critical concern for the agricultural 
sector. With energy legislation pending, an uncertainty as to future 
supplies and prices permeates the fuel situation. However, the general 
trends of relatively tight supplies and associated increasing prices 
may be expected to continue. The various energy forms used most 
intensively in the agricultural sector face different supply constraints, 
with the situation for some fuels being more serious than for others. 

Natural gas 

The extreme cold of last winter brought on predictions of natural 
gas shortages. While another such winter may not be likely, the natural 
gas shortage has not gone away. The Federal Power Commission in 
August projected that 1977-78 delivery of natural gas could fall 170 
billion cubic feet below the level of last winter and that curtailments 
of gas contracted for delivery might run to 23 percent as compared 
with 21 percent a year ago, with most of this impact falling on the 
industrial sector. 

However, recent indications from major natural gas pipelines mod- 
erate this projection somewhat. By increasing storage, planning for 
emergency gas purchases and through increased supplies, excessive 
industrial curtailments should be avoided. Some curtailment of indus- 
trial users can still be expected, especially on days of peak usage. 

Industrial, commercial, farm and residential users can expect higher 
prices for the gas they receive. In the event of another very severe 
winter, some food processors such as meat packing plants and milk 
processors could find their gas supply curtailed. If they have no alter- 
native fuel capability, farmers could end up dumping milk and delay- 
ing the shipment of livestock. Irrigators in many areas are likely to 
experience difficulty in obtaining natural gas in preferred quantities, 
due to curtailments or high prices. 

Prices for natural gas have been increasing rapidly, having taken 
a quantum leap in 1973-74, and increasing steadily since. Because 
natural gas prices deviate so much from State to State and from user 
to user, it is impossible to arrive at a typical price paid by farmers. 
However, prices in unregulated areas have more than doubled between 
1973 and 1975, and have increased significantly in regulated areas. The 
regulation issue is under congressional discussion along with other 
energy legislation. However, natural gas prices may be expected to 
increase 10 to 20 percent for agricultural users. 

LP gas 

The outlook situation for LP gas is closely tied to that for natural 
gas. Traditional LP users such as agriculture find increased competi- 
tion for this fuel resulting from natural gas shortfalls. There is a 
problem of LP supplies being: diverted to industrial users as they try 
to adjust to natural gas curtailments. 



148 



Propane inventories as of September 1976 were down considerably 
from 1 year ago. In September 1976, the American Petroleum In- 
stitute reported inventories of 95,125 thousand barrels while the com- 
parable figure for 1977 was 86,675 thousand barrels, a decline of 
almost 9 percent. However, crop drying is proceeding as usual this 
fall, with no major disruptions reported thus far. Farmers should 
maintain full storage tanks however, in anticipation of possible short- 
term supply bottlenecks. 

LP gas prices almost doubled between 1973 and 1974, disrupting 
a rather stable historic trend. Since then, prices haA^e increased from 
7 to 18 percent a year. The price reported by SRS, USDA for July 
1977 was nearly 40 cents a gallon. A 10 to 15 percent price increase may 
be expected for the coming crop j^ear. Very tight supplies will exacer- 
bate the situation. 

Diesel and gasoline 

Xo supply problems are indicated for either diesel fuel or gasoline 
for the coming year. Farmers should be able to obtain all needed 
supplies with little difficulty. Again, another unusually cold winter 
could throw a monkey wrench into the distribution system causing 
spot disruptions, but this would be unexpected. The major price jump 
for gasoline and diesel also occurred in 1973-74. Since then, increases 
have leveled off to the 5 to 10 percent range, with diesel prices increas- 
ing-somewhat more rapidly than gasoline. Indeed the price differential 
of these fuels has been narrowing gradually. October 1977 figures for 
bulk delivery gasoline and diesel were 57.8 cents a gallon and 45.3 
cents a gallon respectively. Five to 10 percent price increases should 
be expected next year. 

Electricity 

The strong growth in electricity demand experienced over the past 
few decades has begun to level off. This slowing increase in annual 
demand is likely to permeate all sectors. 

Reserve margins for all regional areas appear adequate to meet 
winter peak demands for 1977-78. Reserve margins will decrease for 
the summer of 1978 but they still appear sufficient to meet electricity 
demand for the coming crop year. 

TABLE 1.— CHANGES !N FARM TRACTOR AND MACHINERY UNIT PURCHASES, UNITED STATES, 1975 TO 1976 AND 
JANUARY-AUGUST 1976 TO JANUARY-AUGUST 1977 



Change in machinery unit sales 
(percent) 



Januarv- 
Aupust 1976 

to Januarv- Chance in 

Type of machinery 1975 to 1976 August 1977 price," 1976-77 



Tractors: 

2-wheel drive .„ -5.3 -2.1 +7-11 

4-wheel drive -.9 -24.0 +6 

All tractors.... -5.0 -3.5 

Combines -1.5 -16.4 10-12 

Forage harvesters —14.6 —4.1 +15 

Corn heads.... -8.1 -21.1 +9 

Balers... - +1.2 -5.3 +6 

Mower conditioners +.1 —3.6 +6 

Manure spreaders +1.2 -20.7 +7-8 



1 June 15 each year. 



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TABLE 4.— FERTILIZER SUMMARY, UNITED STATES, 1973-74—1977-78 
[1.000 short tons] 



Item 



1973-74 



1974-75 



1975-76 



1976-77 



1977-78 



Nitrogen: 

Domestic supply 

Imports 

Total available supply... 
Exports 

Net supply 

Consumption (demand) 

Unidentified disappearance 

Phosphate (P2O5): 

Domestic supply 

Imports 

Total available supply... 
Exports 

Net supply 

Consumption (demand) 

Unidentified disappearance 

Potash (K2O): 

Domesticsupply 

Imports 

Total available supply... 
Exports 

Net supply 

Consumption (demand) 

Unidentified disappearance 



10, 094 
1,068 



9, 343 
1, 198 



10, 481 
1,219 



10, 748 
1,841 



11, 400 
1,950 



11. 162 
1,269 


10, 541 
1,115 


11,700 
1,239 


12, 589 
1,250 


13, 350 
1,450 


9,893 
9, 157 

735 


9, 426 
8, 601 
825 


10,461 
10,412 
49 


11,339 
10, 642 
697 


11,900 
10, 400-10, 700 
1,500-1,200 


6, 869 
315 


7,230 
274 


7, 345 
221 


8, 033 
248 


8,150 
220 


7, 184 
1,581 


7, 504 
1,860 


7, 566 
2, 176 


8, 281 
2, 500 


8, 370 
2, 600 


5, 603 
5, 099 
504 


5, 644 
4, 507 
1,137 


5, 309 
5, 228 
162 


5, 781 
5,622 
159 


5,770 
5, 400-5, 700 
370-70 


2, 604 
4, 114 


2, 287 
3,847 


2,313 
3,910 


2, 584 
4, 955 


2, 600 
4, 500 


6,718 
947 


6, 134 
848 


6, 223 
911 


7, 539 
994 


7,100 
1,000 


5,771 
5, 083 
688 


5, 285 
4,453 
833 


5,312 
5,210 
102 


6, 545 
5,833 
712 


6, 100 
5, 500-5, 800 
600-300 



CHART 1 

FERTILIZER PRODUCER INVENTORIES BY MONTHS, 1976-77 
(Million tons] 



Month 



N 



1976 



1977 



P:0 3 



1976 



1977 



K 2 



1976 



1977 



January 

February... 

March 

April 

May 

June 

July 

August 

September. 

October 

November.. 
December.. 



2. 64 2. 61 

2. 87 2. 47 

2. 57 2. 23 

1.64 1.26 

1.40 1.16 

1.34 1.20 

1.58 1.60 

1.60 1.92 

1.69 

2.01 

2. 09 

2.45 



0.80 0.56 
.85 .55 
.75 .42 
.58 .40 
.57 .51 
.59 .59 
.55 .60 
.50 .55 

.47 

.54 

.65 

.76 



1.88 1.48 
1.99 1.62 
1.83 1.40 
1. 40 1. 20 

1.53 1.24 
1.59 1.45 
1.41 1.20 
1.11 .92 
1.00 1.00 

1.11 

1.31 

1.39 



152 



Fertilizer producer inventories by months, 1976 and 1977 



Million Tons 
3.0 - 



2.0 - 



1.0 



0- 




\ K 2 (U.S. 

and Canadian) 



i i i l 



I I l I I i I l I I I I 
J FMAMJ JASONDJ FMAMJ JASOND 
1976 1977 

Joe's not include urea 



CHART 2 

AVERAGE PRICES PAID BY FARMERS FOR SELECTED FERTILIZERS, UNITED STATES, 1973-77 

[Dollars per ton] 



1973 1974 1975 1976 1977 



Sep- Sep- Octo- Octo- Octo- 

Selected fertilizers April tember April tember April ber April ber May ber 



Anhydrous ammonia 87.60 92.50 183.00 229.00 265.00 219.00 191.00 182.00 188.00 177.00 

Superphosphate (46 percent, 

P 2 5 ) 87.50 94.10 150.00 188.00 214.00 179.00 158.00 146.00 148.00 150.00 

Potash (60 percent K 2 0) 61.50 63.60 81.30 91.00 102.00 94.30 95.90 94.20 96.90 94.50 



153 



Average prices paid by farmers for 
selected fertilizers, United States, 1973-77 



Dollars 


















200 - 




/ 
/ 

/ 




> 
/ 


/ 

* / 

f * 


100 - 






n — 


1 1 


1 1 



Anhydrous ammonia 



Superphosphate 

(46% P 2 5 ) 



Potash (60% K 2 0) 

I 



April Sept April Sept April Oct April Oct May Oct. 
1973 1974 1975 1976 1977 



Production capacity of selected nitrogenous 
fertilizers, United States, 1970^78 



Million Tons 



Item 


1970 


1971 


1972 


1973 


1974 


1975 


1976 


1977 


1978 


Anhydrous 
ammonia 


16.8 


16/5 


17.1 


16.9 


16.8 


17.5 




18.8 


19.6 


23.2 


Urea 


4.2 


4.4 


4.5 


4.2 


4.2 


4.9 


6.0 


6.7 


7.1 


Ammonium 
nitrate 


9.1 


8.0 


7.7 


7.7 


7.7 


8.2 


8.4 


9.3 


9.7 



154 



Average prices paid by farmers per 20-pound unit 
of nitrogen contained in nitrogenous materials, 

United States, 1973-1977 



Dollars 



Nitrogenous 


1973 


1974 


1975 


1976 


1977 


Fertilizer 


April 


Sept 


April 


Sept 


April 


Oct 


April 


Oct 


May 


Oct 


Sulfate of ammonia 


2.69 


2.90 


5.37 


6.68 


7.22 


6.10 


4.79 


4.62 


4.97 


5.00 


Ammonium nitrate 


2.13 


2.31 


4.15 


5.07 


5.55 


4.66 


4.03 


4.09 


4.30 


4.28 


Urea 


1.98 


2.11 


4.02 


5.10 


5.3S 


4.46 


3.65 


3.69 


3.72 


3.66 


Anhydrous 
ammonia 


1.07 


1.13 


2.23 


2.79 


3.23 


2.67 


2.33 


2.22 


2.29 


2.14 


Nitrogen Solutions 






















28% N 


2.05 


2.18 


4.11 


4.89 


5.68 


4.32 


3.89 


3.86 


4.11 


4.00 


30% N 


1.94 


2.03 


3.70 


4.53 


5.10 


4.20 


3.77 


3.73 


4.03 


3.96 


32% N 


2.09 


2.25 


3.97 


4.78 


5.25 


4.50 


4.09 


4.09 


4.25 


4.24 



OUTLOOK OX COSTS OF COMMODITIES 

<Bv Ronald D. Krenz,* Agricultural Economist, Economic Research Service, 

USDA) 



It has been traditional for USDA economists to make estimates of 
cost of production. However, a formal mandate to develop cost esti- 
mates was initiated by the Agriculture and Consumer Protection Act 
of 1973. This act directed the Secretary of Agriculture to conduct cost 
of production studies on wheat, feed grains, cotton, and dairy com- 
modities, and to update these cost estimates annually. 1 As the initial 
step in meeting this requirement, the Economic Research Service con- 
ducted a nationwide farm survey on cost of production in 197i for 
the commodities named above. Similar surveys have been made in 
1976 on hogs and beef cattle, and in 1977, on potatoes, sugar beets, and 
tobacco. 

Just prior to the legislative mandate, EES decided to establish a 
budget system to develop and maintain crop and livestock budgets 
with standard formats and procedures for all major crop and live- 
stock commodities by geographic region. The purpose of this system 
was to develop and maintain a set of uniform costs mainly for research 
purposes. This effort has developed into what is now known as the 
Firm Enterprise Data System (FEDS). The system uses computer 
programs to build and update budgets for the major producing areas 
for a large number of crops and for several types of livestock. 

IpRS cost estimates 

The cost of production work in ERS presently consists of two major 
components : (1) Farm surveys of costs as called for by the 1973 Agri- 
culture and Consumer Protection Act and (2) The FEDS system of 
computerized budgets. Some cost of production surveys are taken by 
ERS almost every year, with each commodity being surveyed approxi- 
mately every fourth year. During the intervening years, costs are up- 
dated with the FEDS budgets. Surveys of cotton, food grains, feed 
grains, and oilseeds are planned again for 1979. 

The FEDS system maintains approximately 500 crop budgets de- 
picting costs of producing cotton, feed grains, food grains, and oilseed 
crops throughout the United States. These budgets are updated an- 
nually and copies are distributed to farm management extension spe- 
cialists and research people in all of the land-grant institutions and 
to industry people throughout the United States. Comments from 
these people help to keep these cost estimates on track. 



♦Agricultural Economist. Commodity Economics Division. Economics and Statistical 
Service, stationed at Oklahoma State University. Stillwater. Okla. 

1 Section 808, Public Law 93-86, 93d Congress, Agriculture and Consumer Protection 
Act of 1973. 

(155) 



156 



About a year ago, a set of budgets was developed, covering milk 
production m 2-i regions of the United States. These budgets were used 
to estimate dairy production costs for 1975 and 1976. These budgets 
will be updated to provide dairy production costs for future years. 2 

Budgets for hogs and beef cattle were added to the system this 
summer. They have been used to develop estimates of the cost of pro- 
ducing hogs and beef and the reports are currently being reviewed 
for publication. 

In the coming year, budgets will be added for tobacco, sugar beets, 
and potatoes using data obtained from cost of production surveys that 
were taken of these crops during this past year. 

The computerized budgets used by FEDS are being developed pri- 
marily with cost data obtained from the EES cost of production sur- 
veys. Subsequently, each year, the yields and prices of purchased 
inputs are updated using data obtained from the Statistical Report- 
ing Service. Also, the use of fertilizers on four major crops — cotton, 
corn, soybeans, and wheat — is updated each year from data published 
in the fertilizer situation report. In addition, this year, estimates of 
use of chemicals in crop production were updated from a new EES 
survey of pesticide usage. 

This two-pronged approach of surveys and budgets has now been in 
operation for about 3 years. 3 Cost estimates developed a year ago for 
1975, 1976, and 1977 were useful to the Congress this past year in their 
deliberations in developing the Food and Agricultural Act of 1977. 
Target price levels for wheat, corn, and cotton were based on cost of 
production considerations. The 1977 act also specifies that future ad- 
justments in target prices for wheat, feed grains, cotton, and rice will 
be based on changes in production costs. The 1977 act is specific in 
requiring that variable costs, machinery ownership costs, and overhead 
costs be used in the adjustment process. 4 

COST ESTIMATES 

Costs since 1974 

Figure 1 illustrates changes in per acre costs since 1974 for the 
major feed grains, oilseeds, cotton, and wheat. These costs are ex- 
pressed as an index, using 1974 as the base. The costs included are the 
total of the variable production costs, machinery ownership costs, and 
general farm overhead costs. Land and management costs are not 
included. 

Since 1974, the biggest increase in per acre costs occurred in 1975, 
when costs of these crops increased approximately 26 percent. This 
was caused by rapid increases in prices of farm machinery, fertilizer, 
chemicals, and fuel. Costs have continued to increase since 1975 but at 
a slower rate. 



2 See ''Costs of Producing Milk in the United States. 1975 and 107(1." Prepared by tlie 
Economic Research Service. USDA. Senate Committee on Agriculture, Nutrition and 
Forestry. Committee Print 88-252, February 1977. 

3 See Agricultural Economy Report Xo. 3,38. "Cost of Producing Food Orain. Feed Grain 
Oilseeds, and Cotton. 1974-7R. KRS. USD A." Tune 107fi. and "Costs of Producing Selectpl 
Crops in the Fnlted States — 1075-1076. and Projections for 1077." Prepared bv the Efji 
nomic Research Service. T'SDA. Senate Committee on Agriculture and Forestrv, Committee 
Pr1n* SO-r.Of,. January 1077. 

* For a description of future target price adjustment procedures, see "Commodity Program 
Provisions Under the Food and Agricultural Act of 1077." Agricultural Economy Report 
No. 389, Economic Research Service, USDA, Washington, D.C., October 1077. 



157 



160 



150 



140 



130 . 



120 



110 



100 



Major Crops 
Cotton 



Wheat 

. .Oil Seeds 

• • ■ Feed grain 




1974 



— i — 

1975 



— i 

1976 



— — i — 

1977 



— i 

1978 



Figuke 1. — Index of Farm Production Costs. 

Projections for 1978 

Per acre costs are projected to average approximately 6 percent 
higher in 1978 than in 1977 (table 1). The rate of increase in per acre 
costs in 1978 is projected to be greatest for the feed grain crops as a 
igronp than for other groups of crops. The major cost increases in 1978 
will be due to expected increases in prices of fuel, machinery, and 
labor, whereas prices of chemicals arid fertilizer are expected to change 
^ery little. The two crops with the highest percentage increases, oats 
[and flax, use very little chemicals or fertilizers. Thus, the inputs that 
are expected to increase in price the most constitute almost all of the 
purchased inputs that are used on these two crops. 



158 



The 7.5-pereent increase shown for grain sorghum is partially a 
result of rising prices of fuel used for irrigation. Soybeans could 
demonstrate the slowest rate of increase in per acre costs in 1978 
largely because seed prices are expected to decline sharply from last 
year. This decline would offset cost increases in other items. 

Per bushel costs in 1978 will, of course, depend upon yields. Actu- 
ally, 1977 was a good year yieldwise for most major crops. Yields 
reported in the 1977 SES October crop production reports are better 
than they have been in recent years for all crops except peanuts, 
barley, and rice. 

With nonland costs expected to increase an average of approximately 
6 percent per acre, yields would also have to increase by 6 percent to 
keep per-unit costs from increasing. This is not likely to occur. 

Cost projections for 1978 were determined using yields projected on 
the basis of recent trends. A range around the trend yield is included 
to allow for possible variation. For instance, the projected yield of 
corn for 1978 is 92 bushels per planted acre plus or minus 5 bushels, 
or from 87 to 97 bushels per acre. Such yield projections were used in 
the per unit cost estimates presented in figure 2. 

As these figures indicate, per bushel costs are quite variable due to 
variations in yields. Yields in 1978 are projected to be about the same 
as they were in 1977 for wheat, barley, and soybeans. Since per acre 
costs are increasing for these crops, the per bushel costs could go up, 
but only 2 to 3 percent if projected yields were realized. 5 

Table 1. — Pro jected change in per acre production costs from 1977 to 1978 1 
[Percent change 197S versus 1977] 



Crop : 

Wheat +6.1 

Corn +5. 2 

Sorghum +7. 5 

Barley +6.9 

Oats +8. 9 

Rice +6.3 

Cotton +6.4 

Soybeans +2. 4 

Flax +8.4 

- Peanuts +3. 1 



1 Variable, machinery ownership, and overhead costs. 

Rice and corn, yields in 1978 are projected to be slightly higher than 
1977. Per acre costs are also increasing for these crops, but if trend 
yields are realized per unit costs would increase only 2 to 3 percent. 

Yields of peanuts were much below normal in 1977. thus, if 
yields return to normal in 1978, costs per pound Ayjll be decreased 
considerably. 

Yields of cotton, sorghum, oats, and flax wore unusually good in 1977 
and projections are lower in 1978. Thus, with increasing costs per acre 
and lower yields, costs per unit of these crops could increase by as much 
as 10 to 20 percent. 



r - Per bushel estimates for 1977 are based on preliminary yield estimates reported in 
"f'rop Production" by SRS on Sept. 12, 1977. 



160 



SUMMARY 

Estimating costs of production in agriculture is a difficult task. Costs 
are extremely variable from farm to farm and for some items, data 
are very difficult to obtain. Costs vary from year to year due to changes 
in input prices, changes in use of inputs and changes in yields. 

The present ERS method of estimating costs of production includes 
parts, farm surveys taken periodically and annual updated estimates 
based very heavily on SRS yield and price data. 

Between 1974 and 1977, per acre costs for 10 major crops increased 
by 44 percent. Much of this increase occurred in 1975. Per acre costs 
in 1978 are projected to increase about 6 percent. Changes in per unit 
costs in 1978 could vary considerably. If trend yields occur in 1978, 
per unit costs will go up only slightly for wheat, rice, corn, barley, and 
soybeans. They would go down considerably for peanuts and would 
increase considerably for cotton, sorghum, oats, and flax. 



AGRICULTURAL FINANCE: SITUATION AND ISSUES* 

(By John E. Lee, Jr., Director, National Economic Analysis Division, 

ERS, USDA) 



During the next few minutes I would like to discuss the current 
financial situation of farmers and consider some issues that may im- 
pact on the financing of farm production during coming months. Dave 
Lins will follow with a discussion of the outlook for 1978. 

First, the current situation 

In general the current U.S. agricultural situation can be described 
as one in which (1) the equity position of most U.S. farmers remains 
strong; (2) the overall cash-flow position has deteriorated, and (3) 
changes in relative commodity prices have resulted in significantly dif- 
ferent incomes and financial situations depending on the type of farm 
operation. 

Farm indebtedness has increased rapidly during 1977 and will reach 
about $119 billion by January 1, 1978. The estimated $16 billion rise 
in outstanding debt seen in the past year will be a record by a sizable 
margin. Large increases in real estate loans by insurance companies 
are expected to increase those companies' share of all outstanding 
loans. Whether this represents a reversal of the downward trend for 
insurance company market shares or just a temporary pause due to 
general money market conditions remains to be seen. 

Some shift in market shares has also occurred in non-real-estate 
debt. Revitalization of Government loan and storage programs has 
significantly increased CCC loan volume. Emergency loans for dis- 
aster assistance have increased the relative share of the Farmers Home 
Administration. Most of the increase in the market share of these 
two loan sources has come at the expense of commercial banks, in 
spite of an 11- percent increase in bank loan volume. 
m As illustrated in figure 1, the value of farm assets has risen rapidly 
since the early 1970's. This trend has continued throughout 1977 with 
the total asset value expected to rise 9 percent for the year. While 
debts have also been increasing rapidly and have taken a particularly 
large jump in 1977, they remain relatively small compared to total 
assets. Thus, proprietors' equities are high and continued to rise dur- 
ing 1977. 

The broken line of figure 1 indicates what has happened to farm 
proprietors' equity since 1940. Although it was as low as 80 percent 
in the early 1940's and as high as 93 percent immediately following 
World War II, equity has hovered around 85 percent ior the last 



•Eddy LaDue. ESS, on leave from Cornell University, had major responsibility for 
preparation of the talk, with assistance from E. I. Reinsel, R. D. Reinsel, Carson Evans, 
Phil Allen, Steve Guebert, and Bruce Hottel. 

(161) 



162 



TABLE 1.— OUTSTANDING FARM DEBT, JAN. 1 



Percentage of total 



Debt type and year 


Total 
outstanding 
(billions) 


Lorn mercial 
banks 


Cooperative 
farm credit 
system 


Life 
i nsurance 
companies 


Farmers 
Home 
Administr3" 
tion 


Industry ana 
others 


Real estate debt: 














1960 


$12.1 


12.6 


19.3 


23.3 


5.6 


39.1 


1965 


18.9 


12.8 


19.5 


22.7 


6.8 


38.2 


1970 


29.2 


12.1 


22.9 


19.6 


7.8 


37.5 


1975 


46.3 


12.9 


29.0 


13.6 


6.9 


37.6 


1976 


51.1 


12.3 


31.2 


13.2 


6.6 


36.7 


1977. 


56.6 


12.0 


32.6 


13.1 


6.5 


35.8 


1978 i 


64.5 


12.2 


33.5 


13.5 


6. 2 


34.6 










CCC loans 






Nonreal estate debt: 














1950 


12.7 


38.0 


11.4 


9.2 


3.1 


38.3 


1965 


17.9 


39.0 


13.4 


8.6 


3.6 


35.3 


1970 


23.8 


43.3 


19.8 


11.2 


3.3 


22.4 


1975 


35.5 


51.3 


27.8 


.9 


2.9 


17.0 


1976 


39.8 


50.7 


28.0 


.9 


4.5 


16.0 


1977. 


46.1 


50.5 


27.4 


2.2 


4.1 


15.8 


1978 i. 


54.2 


47.6 


27.2 


4.6 


5.4 


15.2 



1 Preliminary. 

15 years. Even with the relatively low income experienced by many 
farmers in 1977, average farmer equity is only expected to decline to 
84 percent, just 1 percentage point below that experienced during 
1975 and 1976. 

Most farmers have sufficient equity so that one or two poor income 
years will not cause widespread insolvency if the value of land and 
capital items remain near or above present levels. Although some de- 
cline in land values in certain areas is possible, current price supports 
should limit the magnitude of further price declines for the major 
crops. Through refinancing, renewals or extensions, most farmers will 
be able to remain in business and their financial jDosition will continue 
sufficiently sound to protect lenders in most loans they make. 

Reduced cash flow 

The cash-flow position of U.S. farmers has deteriorated. Operators 
net cash income from farming for 1977 is expected to be at the lowest 
level since early in this decade. This decline in income can be expected 
to place some farmers in a cash-flow bind resulting in fewer cash 
capital purchases, limited principal repayment or reduced expendi- 
tures for family living. Coincident increases in living costs, capital 
goods prices and outstanding debt levels contribute to the severity of 
the situation. 

Part of the impact of lower cash incomes is illustrated in figure 2. 
The solid line indicates relationship between beginning of year farm 
liabilities and annual net cash farm income. The liabilities represent 
the total outstanding farm debt at the beginning of the year. Net cash 
farm income is total cash income minus cash expenditures. Since the 
porl ion of capital investment that is made with cash rather than bor- 
rowed funds ifi difficult to estimate, the total value of all capital pur- 
chases are included in cash expenditures. Interest is also included as 
:m expense. Although it provides an index of cash flow for comparison 
of year-to-year relationships, the net cash farm income used in these 



163 



BALANCE SHEET OF THE FARMING SECTOR 



200 



- 






Assets / 


- 


- 




/ / 
/ * 








// 


M l../t.A..I«.<M*M>Ml»MH 


Usi 

Liabilities 

■■t>ii)u«m>"tiM"<M ( r (l 1" 


Proprietors' equities 
"V V i i I I i I i 


.... 

i i i i i i i i 


i 



1940 1950 1960 1970 1980 

DATA AS OF JANUARY 1 EACH YEAR. A PRELIMINARY. DATA FOR SO STATES BEGINNING WITH I960. 

us2a neg ers 5717-77(11) 

Figure 1. 

calculations tends to underestimate cash flow somewhat. The under- 
statement occurs because the value of capital purchased with borrowed 
funds is subtracted from cash receipts. Beyond this, these figures do 
not reflect the contributions of CCC loans to the cash-flow position 
of cash grain farmers. 

The slightly over $8 of debt that must be supported by each dollar 
of cash income for 1977 is one-third higher than it has been at any time 
since 1965. The previous high which occurred in 1967 was less than 
$6.50 ; a value which was nearly equaled in 1976. 

Also shown in figure 2 is an index of the cost of family living items. 
Living costs have been rising rapidly during the mid-1970's. This 
implies a continually increasing call on cash income for family living 
and results in a persistent decline in the proportion of each dollar of 
cash income that will be available for debt principal repayment. 

The combined effect of the increased level of debt per dollar of cash 
income and increased living costs could be expected to result in an in- 
creased number of loan renewals, extensions and refinancing. And, 
this is what lenders are reporting. Recently conducted surveys of agri- 
cultural lenders indicate generally higher levels of refinancing and 
easing of credit terms for 1977 compared to 1976. Lenders expect more 
of the same in 1978. 

At this point, something should be said about income to farm opera- 
tor families from off-farm sources. In 1976, off-farm income is esti- 
mated to have been over $30 billion, or substantially greater than net 
farm income. Moreover, this figure probably continues to move each 
year more in line with the general economy than with the farm econ- 



164 




1965 1970 



INDEX 

- 160 

- 120 

- 80 

- 40 

J 1 lo 

1975 1980 



Figure 2. 

omy. Obviously these income sources play a crucial role in the financial 
well-being of farm operator families and improve not only their debt 
repayment capacity but also their credit rating with lenders. We have 
some information about how these incomes are distributed by sales 
classes, but we don't know very precisely Iioav the incidence of off- 
farm income matches the incidence of farm debt or about the quantita- 
tive importance of off-farm income in debt repayment or as a substi- 
tute for debt capital. 

Type of farm differences 

My discussion has focused on the aggregate agricultural situation. 
However, aggregate statistics, tell only part of the story. Commodity 
prices have not moved in unison. Some prices have dropped signifi- 
cantly, others have changed little and in some cases prices actually 
increased. These differences in commodity price movements have 
caused large differences in the financial position of various sectors of 
the farm economy. 

For example, 1977 has been a good year for dairy farmers. Although 
many expenses were up, declining feed costs helped limit expense in 
total. More production combined with firm milk prices to increase 
total receipts. Thus, dairy farm cash flow was strong in 1977, and is 
expected to remain strong in 1978. 

Swine and egg producers also experienced a relatively good year 
in 1D77. Although cash receipts were down slightly from 1976 levels, 
nH incomes were favorable and cash flows will permit most producers 
to enter 1978 in a strong financial position. Lower egg and pork prices 
will make 1978 a more difficult year and are likely to result in deteri- 



165 



orating casli flows and slower loan repayments as the year progresses. 
One advantage that these producers have is that both they and their 
lenders have experienced the ups and downs of normal production 
cycles and are more likely to be financially and mentally prepared for 
the changes that will take place. 

The cattle industry is just completing its third year of relatively 
low or negative net earnings. Incomes are up slightly in 1977 over 
1976, but the increases do not represent sufficient improvement to allow 
recovery from the cash-flow shortfalls of earlier years, nor even to 
make 1977 a good year from a cash-flow point of view. Despite the ex- 
tended period of depressed financial conditions most cattlemen have 
been able to adjust their current debt obligations in line with cash 
flows through an increase in the time permitted for loan repayment. 

Income, and thus cash flows, are expected to continue to improve 
in the cattle industry during 1978. Some additional restructuring of 
outstanding debt will likely be required, but most adjustments have 
already been made. 

Financial conditions for fruit and nut products have been generally 
good in 1977. A larger production of apples and lemons has met ready 
markets. Slightly lower grape and orange crops were offset by higher 
prices. Net incomes in 1978 are expected to be similar to those experi- 
enced in 1977. 

Gross income from vegetable production is expected to be higher 
in 1977 than 1976. The January freeze in the Florida fresh vegetable 
region caused significantly higher prices and improved incomes of some 
producers while inflicting heavy losses on others. This diversity will 
result in extreme variability in the financial positions among individual 
producers. Although these farmers are accustomed to weather induced 
income variability, lenders may observe that variations from producer- 
to-producer and year-to-year are greater than normal this year. 

Wheat and feed grain producers have suffered the most serious de- 
clines in cash income. Market prices of these commodities have dropped 
sharply. Even with generally bumper crops, 1977 cash marketings of 
grain are expected to be 12 percent below 1976 levels. This drop" fol- 
lows a number of years of relatively favorable crop prices and price 
expectations producers apparently had built into their capital invest- 
ment decisions during recent years. 

The large supplies and expected heavy carryover will probablv keep 
market prices near loan rates during 1978 and possibly bevond. This 
assessment depends heavily on developments around the world. But 
if present price prospects are realized, lower cash flows for 1977 and 
1978 will force considerable financial adjustment for wheat and feed 
grain producers. Producers with livestock enterprises or experience 
with crops that have not declined in price can be expected to shift some 
resources to these other alternatives. In regions where off- farm work 
is a realistic alternative, participation in set-aside programs may allow 
some farmers to look more closely at off-farm job opportunities. 

Financial structure adjustments of cash grain farms occurred at 
a rapid rate in 1977. Lenders report large increases in the number of 
loan renewals and extensions and have refinanced much short-term 
debt into long-term debt. More of these adjustments are expected in 
1978. Without significant price increases, repayment periods for exist- 



166 



ing debt will have to be extended to match debt service requirements 

and cash flow. 

Issues 

I would now like to shift to a discussion of some issues which may 
be important in assessing both the current and near future financial 
prospects of farmers. To facilitate discussion I have divided the issues 
into two groups : those primarily influencing the supply of loan funds 
and those primarily influencing demand by farmers for those funds. 
My comments will be limited to a selected set of factors that warrant 
particular attention this year. 

SUPPLY-RELATED ISSUES 

CCC commodity loans are projected to expand sharply during 1977. 
Most of this expansion reflects increases in loans on wheat, corn, and 
cotton. Some additional loan activity for the 1977 crop can be expected 
in early 1978. Commodity loans have two general impacts on the farm 
credit market. First, commodity loans allow farmers to repay operating 
loans and make long-term debt payments earlier than would be possi- 
ble if the lender had to wait until the crop was actually sold. This 
frees funds for other loans and helps borrowers maintain satisfactory 
credit ratings. Since the increased volume of these loans is concen- 
trated in commodities that have experienced the largest price declines, 
the significance of their contribution to cash flows exceed their ap- 
parent importance as indicated by their relationship to total farm debt. 
Second. CCC loans provide a ready source of funds should farmers 
decide to hold increased inventories in hopes of higher commodity 
prices. Without CCC loans these funds would be requested from usual 
lenders. 

The Commodity Credit Corp. stands ready, through ASCS, to 
supply storage facility loans of up to $50,000 at 7 percent interest. 
Between April and October 1977, loan volume under this program 
was approximately $160 million. Loan volume is expected to be over 
$200 million by mid-1978. Although small relative to total farm debt 
this program represents a net addition to the supply of funds and 
could expand rapidly if demand materialized. The relatively low- 
interest rate should be attractive to farmers considering storage facility 
investment. 

Dr fr '/ency payments 

Wheat producers will soon receive an estimated $0.9 billion in de- 
ficiency payments. In addition to easing the cash-flow burden for some 
of the farmers hardest hit by commodity price declines, these pay* 
tnenta will increase the demand deposits of country banks. These pay- 
ments represent about one-sixth of total producer receipts for wheat 
:m« I w ill help forestall serious financial difficulties. The increased de- 
mand deposits should allow bankers to extend existing loans and will 
place them in a better position to assist farmers with spring planting 
needs. 

Machhury manufacturer credit 

Manufacturer shipments of farm machinery to dealers exceeded re- 
tail sales in both 197~> and 1970. Lower incomes for many grain pro- 



167 



ducers have had a negative impact on farm machinery sales again in 
1977, For example, sales of 4- wheeled-drive tractors were down '2± 
percent for the first 9 months of 1977. The buildup of dealer inven- 
tories in 1976 and sluggish 1977 retail sales led manufacturers to in- 
crease available credit to encourage sales. Purchasers can frequently 
get zero interest credit for G months or more. Although manufacturers 
indicate that this program has been successful in reducing inventories, 
dealer lots are still well stocked. 

During 1977 loan funds supplied by machinery manufacturers are 
forecast 7o increase about 25 percent. Manufacturers are expected to 
continue their finance-related merchandizing program in 1978 in an 
attempt to further reduce dealer inventories and bolster sales in what 
could be a year of soft demand. 

The general economy 

The course of the general economy could affect the supply of credit 
for agriculture. The generally higher money market rates that many 
forecast can be expected to reduce bank demand deposits, can draw 
some loan funds into low risk, relatively high yield Government se- 
curities, and reduce agricultural lending by banks and insurance com- 
panies in areas where State usury laws limit interest rates. As general 
interest rates increase, opportunities for bank depositors to increase 
returns by shifting funds from banks to Government and other higher 
return securities will improve. The resulting disintermediation or 
shifting of funds, particularly by large investors, could significantly 
reduce the supply of loanable 1 funds. At the same time, bankers will 
face similar opportunities for investment of their funds. The tempta- 
tion to invest in low-cost, safe, relatively high-interest rate Govern- 
ment securities will be great. Relatively high Federal funds rates 
could reduce the urgency to keep funds loaned out. 

During 1977 the overall economy has had a generally positive effect 
on the level of funds available from commercial banks. Bankers re- 
port that funds have been about in balance with demand. Loans-to- 
deposit ratios are up somewhat but many bankers view this as desira- 
ble. Apparently, insufficient supply is a general problem only in the 
Xortheast. 

DEMAND ISSUES 

On the demand side, factors that have historically been important 
determinants of the quantity of credit desired continue to be impor- 
tant. Farm enlargement and intergeneration transfer, and the coinci- 
dent substitutions of debt for equity capital that is being withdrawn 
by those leaving agriculture, will continue. The rate of farm enlarge- 
ment may lessen in the wheat and cash grain areas, but should remain 
important in many other areas. The demand for credit to replace de- 
preciated basic machine items will continue. There are. however, a few 
demand related issues that merit special consideration. 
Farm incomes 

Farm incomes are down sharply in the wheat and cash grain areas, 
cotton incomes are below 1976 levels, and beef cattle producers and 
feeder incomes remain low. These lower incomes have several impacts 



168 



on demand or need for loanable funds. As income flows dwindle, farm- 
ers generally will tend to postpone farm enlargement and capital 
goods purchases other than essential items. If so, demand for inter- 
mediate and long-term loans will increase less rapidly than in recent 
years. 

On the other hand, low incomes could increase demand for short- 
term funds as farmers turn to borrowing to finance operating expenses 
previously financed out of cash flow, or to refinance existing operating 
debt. Some short-term debt could also be converted to intermediate 
and longer term debt. These type arrangements will become more visi- 
ble when farmers start making arrangements for financing next year's 
operating expenses. 

Notwithstanding these potential impacts, the major impact of lower 
incomes may be the substitution of debt financing for the equity invest- 
ment that would normally take place with higher incomes. Consider- 
able investment is made each year from current net income. For 
example, replacement machines are often purchased from cash income. 
Willi lower incomes the amount of money available for these purchases 
declines sharply* Although some of these machines may not be replaced, 
considerable investment will be made. And an increased proportion of 
the capital used for these purchases will be debt capital. 

Input prices 

Prices of most items farmers buy are increasing. An important ex- 
ception is the price of livestock feed which will be down significantly 
due to lower feed grain prices. Also, fertilizer prices may remain rela- 
tively constant. Lower feed prices reduce the need for loanable funds, 
other things being equal. But in the present situation, lower feed prices 
will likely restore cattle feeders' optimism, resulting in significant in- 
creases in feeding activity and increased demand for short-term loans 
to finance the feeding. Higher prices of capital goods and other items 
farmers buy will tend to increase credit demand. The net effect of recent 
and near-term prices will be an upward push on the demand for loan 
funds. 

Condition of the current capital stock 

During recent years of relatively high prices for wheat and feed 
grains, farmers made large investments in machinery and buildings. 
Machinery investment was, at times, so high that strain was placed on 
manufacturers' production capacity. This activity has led to develop- 
ment of a farm capital stock that is in generally good condition. Pro- 
ducers will, therefore, feel less urgency to buy new machinery and 
building items. 

S* t -aside program 

The Department has announced a 20 percent set-aside for the 1078 
wheat crop. This means that wheat farmers must put an acreage equiv- 
alent to 20 percent of their wheat acreage in conserving uses to be 
eligible for program benefits. Analysts expect this to result in 12 to 15 
percent fewer acres of wheat next year. The reduced acreage could re- 
duce input use (perhaps by slightly less than the acreage reduction) 
and operating expenses, and thus demand for operating loans. Because 



169 



these programs remove some land from production on each farm and 
do not remove whole farms, the main impact on machinery demand 
will likely be less need to trade up to larger sizes. 

At the time of this writing, no decision had been made on set-aside 
for feed grains. To the extent that relative prices induce a shift of corn 
acreage to soybeans, a crop with lower input requirements, overall 
demand for production inputs and operating loans will be dampened. 

SUMMARY 

Agriculture has a high level of equity and, in that respect, remains 
in a strong financial position. However, the net cash flow of agriculture 
is down and the level of debt per dollar of net cash flow is the highest 
it has been in recent history. Considerable variability in the financial 
situation exists among types of farms. Beef producers suffered their 
third year of low and negative incomes and thus additional financial 
adjustments were required. However, most of the dramatic adjust- 
ments have taken place. Wheat and feed grains producers suffered a 
large reduction in cash flow that will result in many adjustments and 
significant restructuring of debt. CCC loans, however, should he]p them 
overcome many of these difficulties. 

The net result of forces impacting on supply and demand of loanable 
fimds would appear to leave demand strong but somewhat dampened 
from recent highs and supply also somewhat lower but adequate to meet 
needs. These forces also suggest a continued rise in farm debt in 1978 
but at a slower pace than in 1977. 

POSTSCRIPT 

The changing financial and income structure of the farm production 
sector makes the sector much more sensitive to instability of prices 
paid and received and to fluctuations in gross receipts and production 
expenses. Some of the changing financial structure is related to the 
increasing dependence on purchased inputs. As a result, net farm in- 
come as a proportion of gross receipts (table 2) has declined from the 
50-percent range early in this century, to the 30- to 40-percent range in 
the forties and the steady decline since then, dropping below 20 percent 
in 1977, 

Thus, in 1950 a 5-percent variation in commodity prices would have 
caused a 12- to 13-percent variation in realized net farm income, other 
things held constant. In 1977, a 5-percent variation in commodity 
prices would cause an approximate 25 percent variation in realized net. 
Likewise, in 1950 a 5-percent increase in production expenses would 
have caused an 8- to 9-percent decrease in realized net farm income. 
Today, the impact of the same percentage increase in production ex- 
penses would cause a 20- to 22-percent drop in realized net. 

The leverage implied in the above examples raises questions about the 
implications of potential income instability for : The financial health of 
the farm sector ; incentives for capital investment ; and attitudes and 
optimal management strategies for both lenders and borrowers. This 
income-credit relationship and its implications deserve far more 
thought and scrutiny than it has received. 



170 

TABLE 2.— REALIZED GROSS AND NET INCOME FROM FARMING, SELECTED YEARS 
[Dollar amounts in billions! 



Including Government payments 



Realized net income 



Year 


Realized 
gross farm 
income 


Production 
expenses 


Amount 


Percent of 
realized 
gross 
income 


1910-14 


._ $7.6 


$3.7 


$3.8 


50.4 


1915-19 


13. 1 


6.1 


6.9 


53.0 


1920-24 


12.5 


7.3 


5.1 


41.5 


1925-29 


13.5 


7.5 


6.0 


44.6 


1930-34 


8.3 


5.2 


3.1 


38.0 


1945 


25.8 


13.0 


12.7 


49.4 


1950 


32.2 


19.4 


12.8 


39.8 


1955 


33.2 


22.1 


11.0 


33.3 


1960... 


38.4 


27.3 


H.i 


28.9 


1965 _ 


45.5 


33.6 


11.8 


26.1 


1970 


58.5 


44.4 


14.1 


24.2 


1975 


96.6 


75.8 


20.8 


21.5 


1976 


103.6 


81.7 


21.9 


21.1 






85.5 


20.0 


19. a 



CREDIT AXD FIXAXCE OUTLOOK 



(By David Lins, Agricultural Economist. National Economic Analysis Division, 

ERS, USDA) 



Previous discussion by John Lee focused on the current credit 
situation and some of the key issues faced by those concerned with the 
financing of farm production. In my remarks. I will give some projec- 
tion estimates of the financial outcomes in the farm production sector 
for 1978. In addition. I will review the implications of these projection 
estimates as they relate to farm operators, farm lenders, farm input 
suppliers, and consumers. 

The quantitative estimates reported here have been developed with 
the aid of a simulation model of the farm production sector. In 
running this model, we start with preliminary January 1. 1978 balance 
sheet estimates provided by ERS experts. "We then take these esti- 
mates of indexes of prices received and paid for 1978 and generate a 
projected balance sheet, income statement, and cash flow statement 
for 1978. It should be recognized that the projection estimates are for 
the entire United States and substantial differences by region are likely 
to exist. 

PROJECTED CASH SOURCES AXD USES OF FC'XDS FOR 19 78 

Total net cash sources of funds for 1978 are projected to total $79.7 
billion, virtually unchanged from the preliminary estimate for 1977 
(table 1). Some increase in off-farm income is expected, while not 
cash farm income is projected to decline slightly. Reductions in net 
cash income in 1978 appear more likely to occur on cash grain farms 
rather than on farms concentrating on livestock production. If one 
deflates cash income projected for 1978 to get real dollar flows, then 
real net cash income in 1978 is projected to be more than 4 percent 
lower than in 1977. and more than 25 percent lower than 1973. 

Net increases in debt are expected to account for 18 percent of the 
net cash flow of funds. While this percent is about equal to 1977, the 
importance of borrowed funds has increased substantially in recent 
years. There is also increasing concern whether the income of farm 
operators can support the debt load. A proxy measure o,f the relative 
burden of debt is given by the ratio of debt outstanding to total net 
cash income (figure 1). This ratio has increased tremendously in re- 
cent years and reflects the fact that increases in debt have far outpaced 
increases in income. 

(171) 



98-723—77 



' 12 



173 




Annual capital formation for 1978 is forecast at $17.6 billion, a small 
increase over 1977. If one deflates the capital expenditures by the 
prices paid, then real capital expenditures during 1978 should about 
equal expenditures during 1977. Purchases o,f real estate assets from 
discontinuing proprietors are forecast to total $14.1 billion during 
1978. This represents an increase of 11 percent over preliminary esti- 
mates for 1977. The increase reflects in part the projection of an in- 
crease in the rate of real estate transfers. 

Personal consumption and other cash uses of funds are forecast to 
total billion during 1978. Both in current and real dollars this 

reflects a drop from 1977. 

THE PROJECTED BALANCE SHEET, JANUARY 1.19 79 

The projected value of farm assets as of January 1, 1979 is forecast 
at $782.4 billion (table 2). This would be an increase of 7.2 percent 
for 1978. As in other recent vears. most o,f the increase in value is at- 
tributable to unrealized capital gains since the value of assets in 1967 
prices is projected to remain virtually unchanged. 

Financial' assets are expected to grow by roughly 4 percent during 
1978. But in term? of the real purchasing power, a decline is expected. 
This decline can be attributed to estimated reductions in real income 
of farm operators during 1978. 



174 



Nonreal estate assets include farm machinery and motor vehicles 
crop and livestock inventories, and household furnishings and equip- 
ment. The total value of nonreal estate assets is forecast to be over 12 
petent higher at the end of 1978 than at the end of 1077. Much of the 
increase reflects valuation changes, although physical stocks of crops 
and livestock are also projected to increase. 

Farm real estate values are projected to increase by nearly 6 percent 
during 1978, a substantial drop from the 10 percent increase now ex- 
pected for 1977. The slower growth in land values results from the 
projection of lower .farm income, relatively high interest rates and 
moderation of price increases in the general economy. The projected 
increase iu farm real estate values is based upon the assumption that 
buyers expectations of capital gains will remain strong. But as shown 
in figure 2 there is a growing disparity between the value of farm 
real estate and the income generated from farming. Questions may be 
raised as to how long that disparity can continue to grow. In some 
areas, particularly in cash grain areas, the decline in commodity prices 
in 1077 has lead to reductions in farm land values. This pattern could 
continue in 1978 if grain prices remain low. 

Farm debt is projected to increase by about 12 percent during 197^. 
Real estate debt is expected to grow by more than nonreal estate debt 
because of a projected increase in the value of land transferred and 
because some farm operators will be refinancing short-term loans with 
real estate debt. Demand for nonreal estate loans should also remain 
strong because of the expected increase in production costs combined 
with relatively low prices received on farm commodities. 

TABLE 2.— BALANCE SHEET FOR THE FARM SECTOR, JAN 1, 1978 AND FORECAST TO JAN. 1, 1979 

[Dollar amounts in billions] 



1978 to 1979 percent 
Current values Values in 1967 prices change with— 



Item 


Jan. 1, 
1978i 


Jan. 1, 
1979 a 


Jan. 1, 
1978! 


Jan. 1, 
1979 2 


Current 
values 1 


Values in 
1967 prices2 


Physical assets: 

Real estate assets.^ . _ 

Nonreal estate assets 3 


$546. 9 
148.0 


$579. 4 
167.0 


$198.5 
74.1 


$198.7 
75.7 


5.9 
12.8 


0.1 

2.2 


Total, physical assets 


694.9 


764.4 


272.6 


274.4 


7.4 


.7 


Financial assets: 

Commercial bank deposits and 

currency 

Other financial assets*... . 


16.4 
18.3 


17.0 
19.0 


7.9 
9.0 


7.8 
8.7 


3.7 
3.8 


-1.3 
-3.3 


Total, financial assets 


34.7 


36.0 


16.9 


16.5 


3.7 


-2.4 


Total, farm assets 


729.6 


782.4 


289.5 


290.9 


7.2 


.5 


Debt claims: 

Real estate debt 


64.5 


72.9 






13.0 




Nonreal estate debt including CCC 
loans . . 


54.2 


60. 1 






10.9 














Total debt 


118.7 


133.0 






12.0 




Fquity 


610.9 


619.4 






6.3 . 

















Percent: 

Debt to asset ratio 16.3 17.0 4.3 

Debt to equity ratio 19.4 20.4 5.2 



I Preliminary estimate. 
Forecast by the AIW simulator. 

1 Includes machme-y and motor vehicles, household furnishings and equipment and inventories of crops (including 
crops held as security for CCC loans) and livestock 

4 Includes U.S. savinps bonds and investments in farmer cooperatives. Does not include financial claims on specific 
nonfarm assets such as holding of common stock as data on these claims are not ava:lable. 



300 




Year 



Figure 2. — Trends in land values and net farm income 



An increase of $38.5 billion in the equity of farm proprietors is fore- 
cast for 1978. But if one deflates the January 1, 1979 value to measure 
real purchasing power, then proprietor's equities in real terms are 
expected to be about the same at the start of 1979 as at the start of 
1978. 

IMPLICATIONS OF PROJECTION ESTIMATES 

For farm lenders 

Projection estimates for 1978 portend more difficult times for a 
number of lenders serving agriculture. Repayment ability of farm 
borrowers will be reduced because of low farm income. Difficulties 
will most often arise with young operators who are highly leveraged 
and have few financial reserves. Delinquencies among such borrowers 
are expected to rise. More established farm borrowers have gained con- 
siderable equity in land, but may still have cash flow problems. In 
these cases, lenders may be asked to restructure debt. That is, farm 
operators may want to mortgage land to obtain funds to meet payment 
schedules on short and intermediate loans or to finance operating 
•expenses. 



176 



Commercial banks may experience more problems than other lend- 
ers in meeting loan demands of farm operators. Going into 1978, loan 
to deposit ratios for rural banks in some regions were at an all-time 
high. Further increases in the loan to deposit ratio for these banks 
does not seem feasible. Hence, expansion of loan volume may be cur- 
tailed since deposits in rural banks are not likely to keep pace with 
loan demand in a period of reduced farm income. Well established 
operators will continue to be served, but more marginal operators or 
new borrowers may have difficulty in obtaining bank loans. 

Because production credit associations (PCA's) acquire loan funds 
through the national money markets, no problems in acquiring funds 
,for agriculture are anticipated. But like other lenders, repayment diffi- 
culties of their borrowers will be more pronounced than in previous 
years. Many borrowers will attempt to hold inventories in hopes of 
higher prices in the future. Providing the financing for the holding 
of such inventories will be a real concern to PCA's and other lenders. 

Federal land banks and life insurance companies will experience a 
high demand for real estate loans. While obtaining the funds neces- 
sary for such loans should not be a problem, the income generating 
capacity of the borrowers may be cause for concern. Net income from 
farming in 1978 is projected to be about equal to that obtained in 1972. 
Yet the price of farm real estate has more than doubled over the same 
period. Clearly, the ability to pay current prices for farm real estate 
out of farm earnings has been reduced. 

The Farmers Home Administration will likely experience a greater 
volume of loan requests in 1978. Because of low income and poor re- 
payment ability, more farm operators will be unable to obtain financ- 
ing from other lending sources. Many of these borrowers may seek 
financing through the Farmers Home Administration. 

One of the uncertainties in 1978 for farm lenders will be the dollar 
volume of crops placed under CCC loan. Loan funds provided through 
CCC could reduce the demand for operating loans from other sources 
such as banks and PCA's. Market prices relative to support rates are, 
of course, an important determinant of the demand for CCC loans. If 
market prices are about equal to or below support rates, loan volume 
could be high. Current expectations are that market prices may be 
about equal to support rates. Consequently, the volume of CCC loans is 
expected to be high in 1978 and this will tend to moderate an already 
high demand for nonreal estate loans from banks and PCA's. 

For farm operators 

The projection estimates suggest that farm operators will experi- 
ence a reduction in net farm income in 197S over 1977. In real dollar 
terms, the expected decline from the previous four years suggests that 
purchases of personal consumption items will need to be trimmed. The 
importance of nonfarm income is becoming more pronounced and 
these sources of income will need to be maintained or expanded in 
1978. 

The projected reduction in farm income means that more farm op- 
erators will have problems repaying their debts, financing new ac- 
quisitions, and meeting operating expenses. Repayment difficulties 
seem likely, especially for those operators who are highly leveraged 



177 



and produce commodities hardest hit by price reductions. In some 
case, these operators may need to search for new lending sources. 

For more established farm operators who have considerable equity 
in real estate, loan repayment difficulties may still arise. High equity 
in real estate is no guarantee of sufficent cash flows necessary to meet 
consumption needs and repay debts. Farm operators in this' category 
will likely continue to be financed by their regular lending source. 
However, the lender may demand more security and may more closely 
scrutinize the income generating potential of new investments. In 
cases where loan repayment difficulties are severe, lenders may sug- 
gest long-term debt repayment plans. 

In considering capital expansions, farm operators will need to care- 
fully evaluate the income potential of such investments. Grain storage 
facilities are expected to be one of the more favorable investment al- 
ternatives available. In some cases, machine sheds, barns, garages,, 
and other structures may be converted to temporary storage locations. 
Investments in new tractors and other farm implements may be post- 
poned by a sizable number of operators. 

Purchases of farm real estate to expand farming operations are be- 
coming more and more difficult for many farm operators. In many 
cases the price of land cannot be justified solely by the income gen- 
erating potential of the land. Bather expected capital gains on land 
have become a more important part of the price paid for land. But 
capital gains on land do not generate cash necessary to meet loan com- 
mitments. Consequently, the purchase of land can be most easily han- 
dled by individuals or institutions with large financial reserves or with 
substantial income from nonfarm sources. Young farm operators 
seldom meet these criteria. 

Outside equity capital sources, such as mutual funds or foreign 
investors do meet these criteria. These investors are seeking invest- 
ments with strong capital gains potential, and the rate of inflation 
of farm land in recent years has far exceeded the rate of inflation in 
the general economy. Consequently, interest in farm land by outside 
equity capital sources should remain strong in 1978. 

The growing disparity between the price of farm real estate and 
farm income should be a source of concern to all farm operators who 
recently purchased land or those who plan to purchase in the near 
.future." The concern is whether capital gains on land will remain strong 
in the face of current farm income trends. As long as buyers expect 
land values to increase and as long as there are adequate sources of 
income generated on other assets, land values should continue to rise. 
But if expectations of capital gains are reduced or reversed, a decline 
in land values would likely follow. 

For farm input suppliers 

The implications of farm finance projection estimates for input 
suppliers vary substantially from one supplier to another. Farm de- 
mand for major capital items will likely be reduced because of low 
farm income. Machinery manufacturers and dealers may find it nec- 
essary to offer delayed payment and easy credit terms to promote the 
saWof their products. Suppliers of production inputs such as seed, 
chemicals and fuels may experience small reductions in demand for 
their products as a result of Government set-aside programs. More im- 



178 



portantly, there may be an increasing tendency for farm operators to 
delay payments on open accounts. 

Input suppliers, particularly those furnishing operating items, will 
be faced with increasing concerns over accounts receivable. Increases 
in open accounts may appear to be an attractive alternative for farm 
operators who face a liquidity problem and cannot obtain adequate 
financing from the traditional lending sources. 

Contrary to most input suppliers, grain storage manufacturers and 
suppliers should experience strong demand for their products in 1978. 
Many farm operators want to hold grains in hopes of better prices. 
In addition, Government loan programs for the construction of grain 
storage facilities should provide further impetus to an already strong 
demand. 

For consumers 

The projection estimates outlined earlier have several implications 
for consumers. Projected prices of farm commodities suggest that 
increases in food prices should be moderate. Increases in food prices 
that do arise are more likely to be caused by increasing costs in the 
food processing and distribution sector than by increases in commod- 
ity prices at the farm level. 

Moderation in food price increases, however, is not without cost to 
consumers. As a part of the tax paying public, consumers must help 
pay the costs of Government support payments to farmers. Support 
payments to farmers, however, are a very small fraction of the Federal 
budget. The value of stability in food prices needs to be weighed 
against the cost of support programs. 



FARM FIXAXCE— CURRENT DEVELOPMENTS IX 
PERSPECTIVE 



(By Emanuel Melichar, Senior Economist, Division of Research and Statistics, 
Board of Governors of the Federal Reserve System 1 ) 



As described in the preceding papers by John Lee and David Lins, 
a rise in farm debt (excluding CCC loans) of $11 billion, or 12 percent, 
in 1976 is being followed this year by a further increase of about $15 
billion, or 14 percent. A glance at the record of the past four decades is 
sufficient to establish that increases of the magnitude of 14 percent in 
a single year have been more characteristic of experience during farm 
boom years such as 1950-51 and 1973. rather than of a period such as 
1977 in which farm income is relatively depressed and has few pros- 
pects for significant near-term improvement. As a result, key financial 
relationships examined in this paper now exhibit unusual and worri- 
some levels. As confirmed by reports from the most vulnerable farm 
lender group — rural commercial banks — the farming sector has 
entered a difficult financial period. 

In assessing current farm financial developments, a longer term 
perspective is at once both highly useful and of limited usefulness. 
It is useful in establishing that the sector has just gone through a 
major boom in capital expenditures and land prices that involved a 
relatively high level of debt financing. Such experience in any sector 
is followed by financial shocks if income flows fall significantly from 
the levels that triggered and fed the boom. For the farming sector, 
however, the longer term perspective fails to provide an adequately 
relevant comparison with similar previous episodes and their after- 
math. Such periods in this century are few in number as well as 
strongly affected by special circumstances. The prolonged farm boom 
spanning World War II, the Marshall plan, and the Korean War was 
atypical in its lack of significant debt financing and in the highly 
liquid state of both farmers and rural banks at its conclusion. A small 
boom in the mid-1960's was too minor to provide useful analytical prec- 
edents for present experience. Recent farm income and other financial 
experience has been remarkably similar to the farm boom of World 
War I, but the financial agony following that boom is today of limited 
relevance — except perhaps to indicate what could occur in the absence 
of Government farm income and credit programs and other financial 
innovations such as insurance of bank deposits and amortization of 
farm mortgage loans. Our longer term perspective will not, therefore, 
provide a guide to probable future experience in the sense, for instance,, 
that business analysts expect from a study of reference cycles. But it 



1 The analyses and conclusions presented are solely those of the author and do nolr 
necessarily reflect the yiews of the Board of Governors of other members of its staff. 

(179) 



180 



will lead one to appreciate that the current situation is highly unusual 
and potentially troublesome. 

The charts that accompany this paper each show animal data 
extending back to 1950. The changing fortunes of farming over this 
period are reflected in the swings displayed by net farm income, shown 
in panel A of chart 1. The early 1950's were the concluding years of the 
World War II — Korean War boom, and were followed by a "cost-price 
squeeze" on net income during the remainder of the decade. Net income 
trended gradually upward during the 1960's, rose sharply in 1972 and 
1973, and then began a decline that is now in its fourth year. The last 
value plotted for this series (and for other flow series in this set of 
charts) is a projection for 1977. 

As also indicated in panel A of the chart, the value of farm assets 
rose during most years since 1950 (the last value plotted is a projection 
for year-end 1977). Most of the total rise has reflected increases in 
asset prices — particularly increases in land prices — as net investment 
has been relatively minor and since 1954 there has also been a net 
decrease in the amount of land devoted to farming. The rise in land 
prices in the 1950's increased farm equity and helped to drive the an- 
nual return from production to around 3 percent of equity, as shown 
in panel B of chart 1. Continued land price increases kept the return 
at about this level during the 1960's and early 1970's. In 1972, the rise 
in land prices accelerated in response to the sharp increase in the 
profitability of farming. After 1973, land prices continued to rise in 
the face of declining net income, and by 1976 the return to equity 
was driven down to 2.4 percent. If, as John Lee has just estimated, 
land prices rose by another 10 percent in 1977, then the net return to 
equity this year has fallen further to about 2.1 percent. 

From the mid-1950's to the early 1970's, the net return to farm 
equity fluctuated narrowly around 3 percent, a performance that drew 
considerable comment. In the early years of this period, it was thought 
paradoxical that land prices were rising when the return was already 
somewhat below that available on many other investments. As the 3 
percent rate of return persisted, however, analysts perceived it as an 
equilibrium level. As total returns to equity trended upward, land 
prices were being bid up by just enough to keep the relative return 
;ii about 3 percent. Reinsel in 1973 noted that this process was highly 
visible in the case of rental farmland in stable agricultural areas. He 
si inwed that as cash rents trended upward, land prices responded in 
] importation, keeping relative net rental returns remarkably constant 
over this period. Parenthetically, as Reinsel has also pointed out, the 
problem with studies concluding that land price trends were unrelated 
to total net farm income over this period is that they^are looking at 
the wrong income flow. 

^ In the mid-1 OOO's, therefore, analysts turned, in effect, to examina- 
tion of the origins of the increasing net return to equity. The most 
powerful influence was the combination of decreasing unit costs of 
production (resulting from technological advances) and constant, 
supported, output prices. Another influence noted was that farmers 
able to achieve above average relative returns were buying land from 
farmers less skilled or fortunate. 

Tic large land price increases of 1972-75 are readily explained by 
1he -harp rise in relative returns. Clearly, if one had assumed a con- 
tinuation of returns experienced in that period and a tendency for 



181 




B. Net return to equity in production assets (per cent) 




I . I 



o_JL 



1950 



1955 



1965 



1975 



Note: Net income shown is farm operators' total net income from farming (USDA series, 
including government payments) plus net rent received by nonoperator landlords. 



Net return to equity is net income from farm production minus returns imputed 
to labor and management (USDA series, The Balance Sheet of the Farming Sector ), 



Chart 1 



182 



relative returns to move toward the former level of 3 percent, then 
one would have concluded — as many apparently did — that land was 
underpriced. Xow, however, if similar assumptions are applied to the 
returns experienced in 1976 and 1977, one concludes that farm land is 
overpriced. If other things (including income, outstanding debt and 
interest rates) were to remain unchanged at their 1977 level, the 3 
percent rate of return to equity could be restored by a reduction of 31 
percent in the value of farm production assets. Alternatively, holding 
assets, debt, and interest rates unchanged, that rate of return could 
be restored by increasing net income from farm production to approxi- 
mately the 1973-75 average. 

To summarize, the land price increases of the period preceding 
1972 were based on increasing returns to this resource, and the factors 
underlying the improved returns were demonstrated. By the late 
1960's, however, the prolonged period of land price rises seemed in 
itself to have begun to influence the land price expectations of land 
market participants and analysts. Panel A of chart 2 shows data under- 
lying this effect on attitudes. The nominal capital gains on farm assets 
plotted in panel A are the increase in asset values minus such net 
investment as did occur each year. By the late 1960 ? s, land market 
participants and analysts had noted the steady capital gains that ap- 
peared to be providing a significant supplement to net farm income, 
and were discussing the concept of "total returns" to farm investment. 
Their experience after 1971 greatly reinforced this outlook. The care- 
fully established relationship of land prices to returns was ignored in 
much purportedly analytical commentary, which was instead replete 
with short-cut references to factors such as general price inflation, the 
fixed supply of land, and increasing population — all factors with a 
bearing on the level of returns to farm assets, but also all factors that 
had in the past coexisted, and could again, with periods of declining as 
well as advancing land prices. 

Those who persist, however, in adding capital gains to income to 
obtain a "total return" to the farming sector should note that only 
the amount by which the appreciation of farm equity exceeds general 
price inflation represents a real gain to owners of farm assets. For 
example, if, as in 1977, each $100 billion tied up in farm equity yields 
nominal capital gains of about $10 billion, but in the same year con- 
sumer prices generally rise by about 6 percent, then real capital gains 
are only $4 billion. In other words, if the owners of this equity were to 
spend more than $4 billion of the nominal capital gains on consump- 
tion, they would erode their real wealth position. Or if, as in 1974, 
prices paid by farm consumers rise faster than prices of farm assets, 
owners of farm equity experience a real capital loss. A comparison 
of not income and real capital gains is shown in panel B of chart 2. 
In real terms, capital gains over the last 5 years average slightly less 
than income, rather than overshadowing income as one might suppose- 
after viewing nominal gains only. Also note that real capital gains 
disappeared in 1968 70. providing a recent example of a period in 
which fain) assets did not appreciate faster than the rate of general 
price inflation. 

Finally^ in any comparisons over time, both income and real capital 
gains should be viewed in dollars of constant farm consumer purchas- 
ing power, as is done in panel C of chart 2. In constant dollars the 
recent levels of income and capital gains are revealed as somewhat 



183 



Three views of farm net income and capital gains 






I — I i i I I I . i , I I I — 1 — I I i . — I i 1 I — i i i i I L 

1950 1955 1960 1965 1970 1975 



Chart 2 



184 



more modest relative to past levels. Income, in fact, has dropped 
below its pre- 1972 level. 

With returns to farm assets now relatively depressed and the con- 
tinuation of real capital gains therefore in doubt, should there be 
concern about further large increases in farm debt such as that 
occurring this year? In both the popular and analytical literature, this 
question is commonly being examined in terms of relationships such 
as those shown in chart 3. These analyses thus exude the confidence 
derived from the recent large absolute increase in equity and from the 
low over-all debt/asset ratio. They note that the farming sector's debt/ 
asset ratio is 16 percent and conclude that the farming sector can 
greatly increase its borrowings — in other words, that the debt/asset 
ratio is able to withstand many more upticks such as the one recorded 
for 1977. 

The financial cushion implied by this analysis, however, is in part 
an illusion. First, the ratio is now near its post-World War II high, 
as it was not reduced significantly during the recent years of farm 
prosperity and asset price increases. More importantly, the average 
return on farm production assets is now about 3 percent while the 
interest charge on new farm loans averages about 9 percent. Given 
this relationship, further borrowing by the sector would tend to 
reduce its net income. If, other things unchanged, the debt/asset ratio 
were to rise to about 30 percent, the return to equity would fall to zero. 
In other words, increased borrowing cannot be sustained for long in 
the absence of income adequate to service the increased debt. 

Other analytical approaches are more valuable in evaluating the 
relative usefulness and safety of ongoing increases in farm debt. The 
significance of increased debt financing can be assessed by examining 
whether it is financing increased capital formation or simply replac- 
ing internal financing of this capital flow. Panel A of chart 4 shows 
that increases in debt have recently been rising faster than capital 
formation. Thus panel B of the chart indicates that increased debt 
financing has recently replaced internal financing to a highly unusual 
degree. In this century, in fact, a comparably high ratio of debt 
financing to farm capital formation has previously occurred only once, 
during the ill-fated speculative boom of World War I. Upon com- 
piling very comparable data, Tostlebe found that debt financing 
averaged 76 percent of farm capital formation during, 1915-19. 

Indeed, as shown in chart 5, the recent increases in debt are far out- 
side previous bounds of their relationship to farm cash flow and net 
income. Such behavior could be regarded as warranted if future in- 
creases in income were in sight, as in 1972, or if the faster rise in debt 
were financing significantly greater capital flows expected to generate 
future income gains. In the absence of such an outlook, the increased 
debt, poses instead a relatively greater future servicing and repayment 
burden. The recent ratios of debt financing to income flows have no 
precedents in this century. According to Tostlebe', the ratio of debt 
financing to net income averaged only 1G percent during 1915-19. and 
then fell to an average of just 2 percent over the next three decades. 
The current rapid rise in the ratio does have a precedent in World 
War I experience, however, as the ratio then rose substantially from 
averages of 7 percent in 1900-09 and 10 percent in 1910-14. Such in- 
creased UJ the ratio both then and now indicate that debt commitments 
arc being incurred at an accelerated rate relative to income flows from 
which they must be serviced. 



185 



Assets compared with debt 



A. Farm assets and debt 



Assets 



Debt 



J i i i i I l 



j I i i i i L 



1950 1955 1960 1965 1970 



1975 



B. Debt / Asset ratio (per cent) 




k - 



1950 1955 1960 1965 1970 1975 



Chart 3 



18 - 

16 - 

14 
12 



186 



Debt financing compared with capital formation 



A. Farm capital formation and increase in farm debt 




Net increase in debt 



1950 1955 1960 1965 1970 1975 



50 - 



1950 



B. Net increase in debt / Capital formation (per cent) 




1955 



1960 



1965 



1970 



1975 



Note: Capital formation consists of expenditures for machinery, buildings, and 

land improvements plus the net change in financial assets and in livestock 
and crop inventories. 



Chart 4 



187 



Debt financing compared with income flows 

A. Farm cash flow, net income, and increase in debt 

A 




1950 1955 1960 1965 1970 1975 




1950 



1955 



1960 



1965 



1970 



1975 



Note: Cash flow is net farm income plus capital consumption allowances 
at replacement cost. 



98-723—77 13 



Chabt 5 



188 



In summary, aggregate farm finance trends indicate a considerable 
potential for future financial problems, but it remains to be seen to 
what extent they will materialize. The key uncertainty is whether the 
level at which farm income settles in the post boom period proves 
sufficient to maintain the past appreciation of farm assets and to sup- 
port further increases in farm debt. At current income levels, the 
financial ratios examined in this paper are not very encouraging. 



i 
( 



ISSUES FACING THE FARM CEEDIT SYSTEM 

(By George D. Irwin, Director of Research, Farm Credit Administration) 



The annual USDA Outlook Conference is always of great interest 
to those of us working in Farm Credit Administration and the Farm 
Credit System. But this year the interest has been even greater than 
normal, due to the deteriorated crop cash flow prospects emerging from 
the past 6 months commodity price skid. In fact, we probably have a 
tendency to focus too much on this, and too little on the relative im- 
provement in livestock industry prospects after several bad years. 

Situations such as the current one arouse our interest for two reasons. 
One is the need to evaluate how long the current crop situation may 
hold — are we in the pits of a cycle and soon to recover, or are we near 
a longer term norm? Some judgment on this question is the necessary 
basis for the System's loan decisions in the future, and for FCA's 
supervisory evaluation of bank lending policies. 

The second reason for our interest is that a worsened agricultural 
setting provides the testing ground for policies followed in the past, 
and guides in developing refinements for the future. It is often said 
that bad loans are made only in the best of times. Optimism based on 
the then current situation is discounted, but usually, not by enough. 
Eighty cent feeder calves get discounted all the way to 60 cents in 
projecting cash flow, with scarcely a thought that we may see 30 cents. 
Or $3 corn or 80 cents cotton may get discounted to $2.75 and 60 cents, 
which turns out not to be a low point. Such optimism, I would remind 
you, could have been justified or bolstered in the past few years from 
the pronouncements of many public officials. We were told we were 
in a new era of tight worldwide supply-demand balances. We heard 
that U.S. devaluation and floating currency rates priced us competitive 
to the world at the price levels of 2 years ago. Some of us may have 
forgotten that other "feed the world" experts had told us the same 
story in 1967-68, just before prices fell out of bed. Like then, the stark 
reality of low price elasticity of demand — the strong price conse- 
quences of moderate excess production — has hit home. Thus the current 
situation provides us an acid test of past activities, and environment 
testing our ability to set a future course. 

Note that I stated our great interest in this conference. I did not 
emphasize any great concern about the financial situation. We are, of 
course, concerned about any financial stresses faced by our borrowers, 
the owners of the Farm Credit System. We are not particularly con- 
cerned about the overall quality of the loan portfolio of the System. 
The reason for emphasizing this point traces back to the general 
question, what are the implications of large size and rapid growth 
of the Farm Credit System. I suspect that size and that growth may 

(189) 



190 



have led many critics to suspect we had experienced unsound growth. 
My message here today is— we think otherwise. Let's first review that 

^Since 1970, FLBA and PCA loans outstanding have tripled, from 
a bit over $11 billion to the mid-30's. The System has become the largest 
overall lender to farmers, second to individuals in the mortgage area 
and second to commercial banks in short-term lending. It is also the 
majority lender to farmer cooperatives. Annual growth in yearend out- 
standings ranged from just over 11 percent in 1970 to a high of 25 

percent in 1971. , , 1 

Thus we have been coping with rapid growth and with large size. 
The opportunity for error would seem to be great. Much of the record 
remains to be written, of course. But we generally feel it will turn out 
to be a good record. FLB delinquencies have been minimal and collec- 
tions have been normal. We have seen some definite increase in the 
percentage of lending going for refinancing, as compared to the past 3 
year.-. Some debt extension would be normal, given 4 years depressed 
livestock conditions and 2 years of poor crops in some areas or de- 
pressed crop prices. But we still see refinancing to long-term debt not 
out of line with the 1970-72 period. On the PCA side, we would expect 
to see any difficulties appear more quickly. But so far, problems have 
been slight. Collection rates do appear to be down somewhat in recent 
months, but renewals are not up. 

There are two problems drawing conclusions from the record so far 
in 1977. First, to say something is less favorable than during the 1973- 
76 period is not necessarily to say things are bad. Relatively, yes. 
Absolutely — it's not so clear. Second, the crop prices decline is a recent 
phenomenon, and problems may not yet be reflected in repayment 
statistics. 

( me cause for optimism is farmers' well-known capacity for belt 
tightening. This was illustrated most recently in associations serving 
cattle producers. Despite several years of adversity, loan experience 
remained good. The vast majority of farmers met their obligations — 
not necessarily without strains on their financial robustness, but they 
met them. 

Let me turn briefly to several other possible areas of concern. At the 
outset, let me emphasize that funding is not a concern. The System 
has always been able to obtain all the funds borrowers want. It has 
been able to do so with highly rated bonds sold at minimal premiums 
over what the U.S. Government pays. We study and innovate to assure 
that access continues. Most recently, the consolidated Systemwide 
bond was introduced. Almost 3 years ago it was Systemwide discount 
notes. Thus we see little reason for concern that farmers will have any 
trouble getting all the funds they can constuetively use, so long as 
thev are willing to pay going market rates. 

The concern we have is on the other side — how much farmers can 
constructively use. And the main issue here is the reduced ra«h flow 
to crop farmers. Those with the heaviest, debt commitments will find 
themselves somewhat vulnerable. I want to touch on problems of two 
groups— young fanners and recent purchasers of farmland. 

Young farmers. — Some of you are aware of the joint farm owner- 
snip lending programs between Farmers Home Administration and 



191 



the Federal Land Bank?. The average aae of borrowers in this pro- 
oTam is about 36 years. The program is designed to bridge the owner- 
ship threshold for farmers who lack the downpayment requirements 
but demonstrate adequate cash flow to service a regular FLB loan plus 
an FmllA loan for the downpayment. During 1976, there were some 
4.246 loans made under this program, and over 12,000 were made dur- 
ing 11)73-75. It includes all ages, both young farmers and others. One 
would expect these borrowers to be the mdst vulnerable we have in the 
FLB portfolio. But the situation from a cash flow standpoint is less 
severe than one might imagine because the term of these loans aver- 
ages longer. Indeed, our analysis suggests the debt service load per 
dollar of income isn't much greater than for all borrowers. 

Recent land purchases. — The extraordinary land price increases in 
the past several years lead to musings over what would happen if we 
were to have half as spectacular a decrease. Those who express this 
sort of concern can point to declining farm incomes, and the higher 
price-to-earnings multiples. They can even cite scattered reports of 
land price declines in some areas. They then generalize to a concern 
over the FLB loan portfolio. I believe the concern is overstated. Loan 
to market value ratios did not increase in the recent past. Last year, 
they averaged 55 percent nationwide, and were only 56 and 52 in the 
St. Louis and Omaha districts, where the biggest price runup occurred. 
The fact is that the land turning at these high prices was going into 
very strong hands. I have had reports that a number of the "chart 
topping'- sales were all-cash transactions! One must also recognize 
that a relatively small portion of land has changed hands at the high- 
est price levels. A rough estimate of the FLB portfolio suggests the 
average loan/market value ratio at the end of 1976 might be 35 percent. 
A very large amount of land would support additional borrowing on 
a collateral basis. And large amounts of nonfarm income support cash 
flow to service such loans. Some 75 percent of FLB borrowers had non- 
farm income in 1976. and nonfarm earnings were nearly 55 percent of 
farm earnings. Over 50 percent of our FLB borrowers had nonfarm 
income of over $10,000 annually. The recent experience must at least 
raise the question of whether land may be being viewed as a store of 
value during an inflationary period, and priced on that basis, rather 
than as a productive asset valued on production capacity. We have a 
ways to go before understanding land price movements. But we know 
that those who predict them based solely on farm earnings changes 
haven't been very successful. 

To sum it up, we would expect the farm income prospects for this 
year to result in some softness in land price. But the more pronounced 
eftect may be a reduced rate of A'oluntary land turnover. That has 
happened historically as farm income fluctuated. Land price has shown 
itself to respond more to farm income increases than to decreases. For 
lenders, this may mean weaker demand for farm mortgage loans in the 
coming months. Borrowers should be in a buyers market, since insur- 
ance companies are expected to have ample funds to commit and to be 
under some pressure to place them. There is less possibility now than 
a few A'ears ago that increased policy loans might dry up their sources 
during this period of rising interest rates. Unlike then, business and 
construction mortgage lending has been weak. We would expect to see 



192 



machinery purchases a major area of fanner belt tightening, and the 
demand for new borrowed funds for machinery to be weak. Ample 
supply conditions in several farm input industries, along with lower 
interest rates than the past 3 years, appear to be causing some increase 
in trade credit as a selling device. This could ease demands on short 
term institutional lenders. 

Finally, CCC lending may have a combination of effects this year — 
partly just earlier sales, in effect, and partly a substitute for borrowing 
from commercial lenders. 

We expect to be working with more farmers who have cash flow 
problems in some crop areas. The policy of Farm Credit System 
remains one of working with such borrowers through the period of 
stress, so long as there is any reasonable prospect of "light at the end 
of the tunnel." The strength of the Farm Credit System has always 
been unmatched skill in delivering a loan service — sound lending and 
sound servicing. 

We see the prospects as good for the longer term "light," with the 
predominate food supplier role of the United States and the relatively 
slim margins of reserves. The new farm bill affords a longer term meas- 
ure of stability in the commodity area. It may have as yet unsuspected 
effects on lending and on farm size enlargement. When coupled with 
proposals for crop and disaster insurance designed to limit downward 
yield risk, we will be facing the question of what happens to U.S. 
agriculture and lending in a less risky environment. Perhaps that 
stabilization will just offset the greater worldwide risks created in 
energy, other input, and currency value fluctuations. I leave you to 
think about that very important question as we move into the discussion 
period. 



PENDING LEGISLATION FOR THE FARMERS HOME 
ADMINISTRATION 

(By James E. Thornton, Associate Administrator, Farmers Home 
Administration) 



The Farmers Home Administration (FmHA) was established in 
1946 as successor to the Resettlement Administration and Farm Se- 
curity Administration, agencies well remembered for helping family 
farm agriculture through the crisis years of depression and World 
War II. 

Under a bill now before Congress, Farmers Home will undergo 
another change of name and become the Farm and Rural Development 
Administration (FRDA). Secretary of Agriculture Bob Bergland, in 
(lis recent announcement of plans to reorganize the Department of 
Agriculture, asked for congressional approval of this name change. 

FAR 31 AXD RURAL DEVELOPMENT 

We hope the bill will pass by early next year, because the change 
of name for this agency is long overdue. "Farm and Rural Develop- 
ment Administration'* will be much more descriptive of FmHA's 
present role as a multipurpose credit agency, serving both countryside 
and towns of the rural United States with farmer programs and a 
wide variety of other programs to meet family and community needs. 

FmHA's concern in the beginning was confined to assisting farmers. 
The role was that of lender and counselor to farm families including 
share croppers who were striving to succeed as independent tenant 
farmers, or move up to ownership of the land on which they made 
their living. Soil and water conservation loans also were available in 
IT Western States. 

In evolving; a service that came to be known as "supervised credit." 
Farmers Home county staff members maintained close contact with 
borrowers and gave them continuing advisory help on farming tech- 
nology, and on farm and home management — all in the interest of a 
successful farming operation and an upward movement to prosperity 
for the family. Supervisory assistance was tailored to the individual 
family's need." FmHA in those early years administered four types of 
loans: farm operating, farm ownership, disaster emergency, and soil 
and water conservation loans. 

But today presents a far different picture. Since the 1950's, Farmers 
Home has undergone almost continuous expansion in the scope and 
volume of its services. When Congress decided to extend to rural 
people the same variety of credit opportunities found in urban areas, 
it usually specified that new rural services would be provided through 
the FmHA network of nearly 1.800 localized county loan offices. Here 
was a rural credit delivery system already well established nationwide. 

(193) 



194 



The first expansion of FmHA's mission came in 1949 with the rural 
housing loan program, originated for the benefit of farmers. In the 
early 1960's the rural housing and soil and water conservation pro- 
grams were opened up to other rural people including those who lived 
in small towns. 

Since the early 1960's. nearly all other types of rural housing, rural 
community facility, and rural business-industrial financing have been 
added to the Farmers Home portfolio. 

Today, FmHA is the principal channel of Federal financing flow- 
ing to agriculture and the rural community through about 30 loan 
and grant programs under the Farm and Rural Development Act. and 
the National Housing Act. 

This agency, which loaned about $300 million in fiscal year I960, 
moved $7.2 billion in fiscal 1977 in the four primary rural develop- 
ment areas of farming, housing, community facilities, and business- 
industrial development. In summary, the main elements of program 
delivery were these : 

Farm credit — 92.460 loans for $2.4 billion; 
Homing — 123.577 loans and 2.037 grants for $3.1 billion; 
Community facilities — 2.453 loans and 1,430 grants for Si. 3 
billion; and 

Business and industry — 584 loans and 143 industrial site grants 
' for $360 million. 

The total comes to 222.684 loans and grants for $7.2 billion. 
Another overall increase of at least $1 billion is budgeted for fiscal 
year 1978. 

Obviously, "Farm and Rural Development Administration" is a 
more appropriate name to reflect such a variety of services to people 
in rural America. 

SERVING SPECIAL XEEDS IX AGRICULTURE 

For all the expansion and diversification, FmHA still carries a major 
responsibility in the field of agricultural credit. 

Measures still pending on our legislative program are mainly con- 
cerned with enlarging and improving farm loan services, in ways that 
cannot be accomplished through administrative action. 

The concept of rural development is not a movement away from 
fanning. On the contrary, agriculture is center stage, the greatest rural 
resource. Farming comprises one-fifth of all the businesses in the coun- 
try and, of course, an even greater proportion of private enterprise in 
the rural sector. The production, processing and distribution of food 
and fiber accounts for one-fifth of the gross national product, and more 
than 15 percent of all civilian employment. Rural development is an 
undertaking to build on this enormous asset by enhancing conditions 
of life in the rural environment that appeal to so many Americans. 

Fai in loan programs of FmHA are intended to support and sustain 
the family farm pattern and thereby fulfill a special need of great 
importance to tlie future of an agriculture based on individual family 
enterprise. These programs also give limited resource family farmers 
an opportunity to become more successful farmers, earn a better living, 
and play a greater role in the communities of which they are a part. 



195 



In the full spectrum of agricultural credit, FmHA at year's end will 
account for about 6 percent of all farm credit outstanding, with nearly 
$4 billion of real estate and $3 billion of nonreal estate farm loan ac- 
counts on our books. As a Government lender, our role is not to domi- 
nate, rather to supplement all financing available from commercial 
sources — but to take the longest step of any lender in emphasizing 
response to need. 

In nonemergency programs of farm real estate and production loans, 
we are serving a limited constituency of family farmers and ranchers, 
operating as individuals and not as partnerships or corporations, who 
find themselves without other sources of necessary credit. This is our 
authority under present law. Those eligible include capable young 
farmers entering into farm operation or making their way through the 
early years of getting established. Some 40 percent of our borrowers in 
regular farm programs are under age 35. 

We also administer the Department of Agriculture's disaster emer- 
gency loan program for farm operators in all categories of size and 
type of operation. In this past year of drought, severe winter and other 
weather adversity such as tornadoes, emergency lending has set a rec- 
ord of nearly $1.2 billion for the fiscal year 1977. 

We have guaranteed more than $950 million of commercial lenders* 
loans under the emergency livestock credit program enacted in 1974. 

We provide other special purpose long-term loans, such as for 
Indian tribal repurchase of reservation lands, improved use and con- 
servation of soil and water on farmland, abatement of pollution, irri- 
gation systems, subsidiary business enterprises on family farms, associ- 
tion grazing ranges benefitting farmers and ranchers — all serving to 
create better opportunity for the rural family to survive and prosper 
on the land. 

We more than doubled the number of dollars loaned by FmHA for 
real estate purposes through participation lending with private insti- 
tutions such as banks and the Federal land banks, and also with sellers 
of land who are willing to take downpayments and give long terms on 
the balance. In such cases, FmHA takes junior liens behind other lender 
liens. This provides joint credit in serving farmers. FmHA farm real 
estate lending in fiscal year 1976, totaling more than $564 million, was 
more than matched by some $692 million of participating lenders' loans 
to FmHA borrowers. A comparable, if not greater, result will be shown 
when figures are available for fiscal year 1977. 

Beyond these loans directly related to agriculture, we administer 
programs under other labels that yield significant benefits to farmers. 
These include the financing of rural water and waste disposal systems, 
fire protection, medical service and other rural community facilities. 
The business-and-industry loans guarantee program is a stimulus to 
the agri-business economy of rural areas. The rural housing program 
is shared by farm families with other rural people. Farm housing 
credit as a rule is drawn from rural housing program funds — not 
against the budget for farm loans. 

In fiscal year 1977, President Carter's special drought emergency 
program resulted in more than $300 million of special projects to im- 
prove and safeguard rural community and farm area water systems 
that were badly affected by drought. 



196 



This emergency action, and the continuing program for buildup of 
reliable water systems throughout the rural United States, is of im- 
mense and enduring value to agriculture, Improvement of water fa- 
cilities is one of the most important measures being taken to reduce 
the weather hazard always confronting the farmer and rancher. 

OUTLOOK FOR IMPROVEMENT OF SERVICES 

We have cited a great proliferation in volume and variety of pro- 
grams, but that is not the only measure of success for Farmers Home 
credit. We look beyond mere statistics that tell us the number of appli- 
cations approved or dollars spent. Attitude and philosophy carry a 
high priority in programs we administer. Our programs are people 
oriented, and our paramount concern must be to provide adequate 
help to those who need our help the most. 

There are shortcomings in farm lending authorities that must be 
cured through legislation, and problems of program delivery that 
must be met through administrative action. But we forsee for the year 
1978 a rising quality as well as volume of service — because of a favor- 
able outlook for needed legislation and the administration's resolve to 
make improvements in agency structure and manifest a higher concern 
for public service. 

On the administrative side, we intend to reemphasize more super- 
vised credit to limited resource farmers, and more attention to the 
needs of the most disadvantaged applicants and borrowers. 

We have found the agency slipping in recent times in the counsel- 
ing service that has been a key to success of thousands of farm families 
making financial progress through these programs over the years. We 
have found also that more attention is needed in assisting minority 
and other limited resource borrower families in becoming successfully 
established in farming. 

Slippage has been attributed to overload of work on FmHA county 
offices personnel who, as programs skyrocketed, remained responsible 
for nearly every type of loan — family, community, and organiza- 
tional — in the FmHA portfolio. 

We are looking into ways of restructuring the field system so that 
our people in county offices can concentrate their time on individual 
bor rowers. We have plans to move up from the county office responsi- 
bility for all loans except those that serve individual applicants and 
borrowers. The processing of loans and grants to groups, communities 
and businesses may be shifted to district offices in areas such as com- 
munity facilities, water and sewer, multifamily housing, and business 
and industry programs. This would relieve the county office of a large 
amount of time required in processing those types of loans. 

FmHA districts within States can be realined to correspond to sub- 
state development districts. This will enable FmHA to work more 
in harmony with local and substate regional agencies in supporting 
goals that people in those areas have established. 

Computer based accounting, collecting and housekeeping functions 
;> re a partial, but not a total answer to restoring high standards of serv- 
ice to borrowers and program efficiency. The weakening of supervised 
credit work during the past 4 years came at a time when inflation of 
housing costs, home maintenance costs, farm production costs and sag- 



197 



ging farm prices called for stronger-than-ever supervised credit efforts 
on the part of FmHA county personnel. Instead, there was a weaken- 
ing of that service. This was accompanied by a rising loan delinquency 
rate — from 12 to 17 percent in farm ownership loans, from 19 to 24 per- 
cent in operating loans, and from 8 to 21 percent in rural housing — 
and consequently a conservative turn of policy with respect to dealing 
with applicants of greatest need. 

By direction of Secretary Bergland, we have suspended moves to- 
ward monetary default foreclosures on farm loans for the balance of 
this year while we study the situation of borrowers in trouble and the 
possibilities for helping them recover. 

LEGISLATION 

The other avenue for improvement is legislation now pending to re- 
vise and update our farm loan authorities. An administration bill has 
been sent to Congress, and hearings have been completed by agricul- 
ture committees of both Houses. We hope for enactment by early 
1978. 

The principal proposals are these : 

— A doubling of the limits on nonemergency farm loans made or 
guaranteed by FmHA, bringing them more in line with the credit 
needs of family farmers under present dav conditions. Limits 
would rise from $100,000 to $200,000 for farm real estate loans, 
and from $50,000 to $100,000 foi production loans. The committees 
also are considering other proposals, not submitted by the admin- 
istration, to authorize FmHA guarantee of other lenders' loans 
up to $300,000 for real estate and $200,000 for production purposes. 

— Introduction of a cost-of -money interest rate on farm real estate 
loans, replacing the subsidized statutory rate of 5 percent, for 
borrowers who can afford the cost-of -money rate. However, the 
Secretary would retain authority to lend ait a lower rate to the 
young farmer or other limited-resource farmer not yet in position 
to pay the cost-of-money rate. A reduction in interest subsidies 
would improve the outlook for increased loan levels ; 

— Negotiated interest rate within reasonable limits, determined by 
lender and borrower, on private lenders' farm loans guaranteed 
by FmHA, and other technical adjustments that would encourage 
commercial lenders to participate more in the guaranteed farm 
real estate and operating loan programs ; 

—Eligibility for family farm partnerships and corporations to bor- 
row under nonemergency programs from which they are now 
excluded; and 

— Separate authorizations for insured and guaranteed loans. 

These amendments would bring about material improvement of 
farm loan services offered under the Farm and Rural Develop- 
ment Act. Under present terms, budget increases for 1978 have had to 
be held to modest proportions — $100 million more for farm ownership 
loans, bringing the annual authorization up to $550 million. The pro- 
duction loan program, already on a cost-of-money basis, is raised $200 
million over last year's ceiling to a level of $825 million for the year. 

Housing legislation already enacted will mean new activity for 
FmHA in the housing field. A $900 million-a-year service in guarantee 



198 



of commercial lenders' housing loans to rural families of above mod- 
erate income will be introduced on the basis of negotiated interest 
rates. All FmHA insured lending will be directed to families of low 
and moderate income. FmHA will implement a rent supplement pro- 
gram similar to the section 8 authority of HUD. The rent supplement 
program will provide subsidy for 20,000 rental units. Occupants will 
pay 25 percent of their income as rent with the Government making up 
the difference between this amount and the market rental rate. Congre- 
gate facilities such as central dining rooms and medical stations may be 
included in multif amily housing projects designed to accommodate the 
elderly and handicapped. The farm labor housing program is extended 
to Puerto Rico and the Virgin Islands. The agency is authorized to pay 
for construction defects that slipped through FmHA inspection. 

What also remains is to resolve confusion between farm loan author- 
ities of Farmers Home and the Small Business Administration. 

SBA has been brought into agricultural lending by acts of Congress 
authorizing that agency to classify farms as businesses eligible for 
loans under its regular and emergency programs. This has raised great 
problems for an agency not prepared either with personnel experienced 
in farm lending, on a delivery system designed to deal with farmers 
in any way comparable to the localized lending organization of FmHA. 
SBA has less than 100 regular offices serving the national agricultural 
domain where FmHA maintains nearly 1,800. 

The Secretary of Agriculture and Farmers Home Administrator 
have entered into agreements with the Small Business Administrator 
to provide FmHA assistance in various ways to SBA in its handling of 
farm loan applications, and in referring applicants to the agency 
that would best serve their needs — SBA or Farmers Home as the case 
may be. 

However, we hope that the coming year will bring agreement that 
SBA should be relieved of its farm loan responsibilities. We expect to 
recommend to Congress with the President's concurrence that Farmers 
Home emergency loan authorities be revised to include some advan- 
tages now offered only under the SBA authority. 

Provisions of the FmHA. legislation now pending in Congress will 
erase some of these differences, as they affect nonemergency credit. As 
a further step, we hope Congress will revise emergency legislation to 
direct farm emergency loans through the established FmHA credit 
delivery system, authorizing disaster emergency loans at a cost-of- 
money rate or at least 5 percent rate of interest, with no requirement of 
test, for credit elsewhere. 

These are highlights of our outlook for service to agriculture in 1978, 
contemplating Our redesignation as the Farm and Rural Development 
Administration. We expect to pursue the course to which Farmers 
Home and its predecessor agencies have been dedicated for more than 
In years— bridging the gap between people's needs, and the assistance 
and support that can be provided only through Government, 



COMMODITY OUTLOOK 



THE INTERNATIONAL SETTING FOR SUGAR AND 
SWEETENERS 

(By Robert N. McConnell, Director, Sugar and Tropical Products Division, 
Foreign Agricultural Service, USDA) 



In the year coming to an end, most aspects of the world sugar sector 
followed trends that had been evident in 1976. Sugar production con- 
tinued to increase and despite some growth in consumption, year-end 
stocks spiraled upward. The one major aspect that didn't move upward 
was prices, which have generally declined. 

But the sector may have reached a watershed. While further in- 
creases in production, consumption and stocks are expected in 1978, 
there is a basis for predicting higher market prices. And beyond 1978 
there would seem to be some reason to expect a better balance between 
world supply and demand for sugar. 

The Foreign Agricultural Service's first estimate of world sugar 
production in 1977-78 (September- August) is 90.7 million metric 
tons, raw value. 1 Based on past experience, this initial estimate will be 
within 2 percent of the final figure. Weather conditions can still affect 
production in the Southern Hemisphere countries, as well as harvests 
in some North Hemisphere countries. 

The 1977-78 sugar outturn is a record, and would continue the 
steady growth in world sugar production which began with the 
1974-75 crop. The forecasted crop is nearly %y 2 million tons greater 
than the revised 1976-77 production figure, 87.3 million tons. 

Significant production increases are expected in Europe, including 
the U.S.S.R., and South America. Total output of sugar from beets 
is expected to increase 7 percent, while that from cane will rise 2 
percent. 

Further increases in sugar consumption are expected next year. 
Presently, world usage of sugar for the 1977-78 crop year is placed at 
85.7 million tons, about 3 million tons above 1976-77. 

Based on the forecasted production and consumption levels, world 
sugar stocks at the end of the 1977-78 crop year could total 27 million 
tons, some 5 million tons above the estimated 1976-77 ending stocks. 
This would be the fourth consecutive year of stock accumulation. The 
forecasted level would be in excess of 30 percent of the anticipated con- 
sumption, the highest level since the end of the 1968-69 crop year. 

The beet crop in Western Europe has been generally good and total 
sugar production in 1977-78 is expected to be 13.8 million tons, 4 per- 
cent above the 1976-77 outturn. For the European Community, pro- 
duction in the upcoming year will be a record 11.1 million tons com- 
pared to 10.5 million tons m 1976-77. Sugar output at 3.9 million tons 



1 All tons in this presentation are metric (2,205 lb). 

(201) 



202 



will be up nearly 1 million tons in France due to favorable weather 
conditions. In fact, harvested area will actually be down slightly. Pro- 
duction in the United Kingdom is expected to be a record 1 million 
tons on a large beet outturn and good sucrose yields. Little change is 
expected in the German sugar output, as a record beet outturn only 
offset a reduced area and low extraction rate. Italian sugar production 
will be down about one-half million tons as unfavorable spring 
weather reduced the area planted. Also, unattractive prices influenced 
some farmers not to grow beets. Production in Spain will be down 
about 10 percent as drought conditions during the planting season re- 
duced the area sown. The same is true for Greece. 

For Eastern Europe, including the U.S.S.R., it is forecast that sugar 
output will be about 18 percent above the 1976-77 output. Most of this 
growth will take place in the U.S.S.R. ; the 1977-78 production is fore- 
cast at 9.3 million tons, nearly 2 million tons greater than last year's 
freeze affected outturn. While there is little change expected in Rus- 
sia's sugar beet outturn, completion of harvest before any significant 
freezes and reasonable, although not high, extraction rates provide the 
basis for the increased sugar outturn. If Russia ultimately produces 
the forecasted amount, it would be a record and also make the U.S.S.B. 
the world's leading producer of centrifugal sugar. Increased produc- 
tion is expected in Czechoslavakia, East Germany. Hungary, and 
Poland, while the Romanian outturn may decline 10 percent. 

Production in Caribbean nations is forecast to be 8.3 million tons, 
about 300,000 tons above the 1976-77 level. Cuba's output is placed at 
6 million tons, as better weather conditions aided recovery from last 
year's drought reduced outturn. It is expected that production will be 
up slightly in the Dominican Republic, the result of expanded har- 
vested area and greater cane production. Some recovery is forecast in 
the Jamaican and Trinidadian sugar crops as cane and sucrose yields 
return to more normal levels from last year's low points. 

Production in Xorth America, including Central America, will total 
10.4 million tons in 1977-78 compared to 10.9 million tons last season. 
Expanded production in most Central American countries could not 
offset the decline in U.S. output. Mexico's outturn of sugar is fore- 
cast to be nearly 2.9 million tons, setting a new production high for 
that nation. Higher yields are the basis for this forecasted level. 

An increase of nearly 10 percent is expected in sugar production 
in South America. Brazil will account for most of the production 
increase, with output forecast to rise to a record 8.6 million tons, as 
harvested area and cane production continue to increase. There may 
be a small increase in outturn in Argentina and Peru, as well as a 
recovery in Venezuelan production from the very low ,1976-77 level. 
On the other hand, output in Colombia is expected to decline again 
as dry weather conditions will have an effect on sucrose content. 

In Africa, total output is forecast to increase 3 percent. After 
reaching an all-time high in 1976-77, it is forecast that production in 
South Africa will again increase in 1977-78 to 2.1 million tons. An 
expansion of harvested area and cane production will offset only 
average sucrose content. Sugar production in Mauritius may be off 
slightly as a result of insect problems. 

The 1977-78 output of sugar in Asia will be lower than last year's 
level. Production may be off 4 percent from the 1976-77 level and 



203 



total only 18.9 million tons. Declines are expected in a number of 
countries, including the Philippines, Thailand, and the Republic of 
China (Taiwan). A decline in harvested area and yields — the result 
of low prices which reduced producer inputs — are the factors behind 
the estimated 15 percent drop in Philippine sugar production. On the 
other hand, the approximate 20 percent decline in Thailand's sugar 
output is ascribed to drought conditions, as there will be little change 
in harvested area. The sugar outturn in Taiwan in 1977-78 may be 
down 11 percent from the record 1976-77 level, as yields return to 
more normal levels. Production of sugar 2 in India is expected to be 
about equal to the 1976-77 level. However, good yields coupled with 
the expected expansion in harvested area, could result in a significant 
rise in the final production figure. 

There will be only minor changes in the sugar outturns in Australia 
and Fiji. For Australia, the area harvested and yields in 1977-78 
are expected to be nearly equal to the 1976-77 levels. 

Earlier in my presentation, I stated that higher market prices could 
be expected in 1978. In view of the forecasted large increase in pro- 
duction and the pending addition to ending stocks, you may be 
wondering about this price prediction. 

The basis for the prediction is the recently negotiated International 
Sugar Agreement (ISA). The Agreement is expected to enter into 
force on January 1, 1978. While initially the Agreement will operate 
on a provisional basis — that is, while a number of nations like the 
United States will have signed and agreed to implement the Agree- 
ment, their full fledged membership will be subject to parliamentary 
ratification — for part of the year, most provisions of the Agreement 
will be operative from January 1, 1978. 

The price range established in the new ISA is 11 to 21 cents per 
pound, Avorld market. Without getting into specific provisions of the 
Agreement, the price range will be defended by a combination of 
export quotas and stock accumulation and release. When prices are 
between 15 and 19 cents per pound market intervention will be at a 
minimum. 

As the ISA comes into existence, shipments by exporting members 
will be regulated by quotas. It is estimated that these exporters have 
the potential to ship about 17 million tons of sugar in 1978. However, 
the market in 1978 cannot absorb this much sugar. Therefore, the 
Agreement provides that exporting member shipments will be limited 
to about 13.3 million tons. An additional reduction in this level may 
be made during 1978 if the market price remains below 11 cents. 
Also, quantities that exporters cannot furnish against their quotas 
will not be redistributed to other exporters when the market price 
is below 12 cents. 

Some of the potential "surplus" sugar supplies will be absorbed by 
the stock provisions of the ISA — exporters are required to place into 
these stocks at least 1 million tons during the first year of the 
Agreement. 

There also will be restrictions placed on importers which could 
have a price enhancing effect. Importing members will undertake to 



3 Including Khandsari. 
93-723—77 14 



204 



limit their purchases from nonmembers, as a group, to 75 percent 
of the amount purchased during a historical period when prices are 
between 11 and 21 cents, and 55 percent when prices are below 
11 cents. 

Through the various Agreement elements I have mentioned, there 
will be "created," in the short run, an artificial balance between 
supply and demand. During 1978 it is probable that world market 
prices will rise in response to this balancing of supply and demand. 
There is a good chance that the price will climb within the ISA 
range before the end of the year. 

Over the longer runs, the ISA, by assuring producers better prices, 
but at the same time protecting consumers from price run-ups of the 
type that occurred in 1974, could result in a fundamental balance 
between world sugar supply and demand. It is unlikely that major 
sugar exporters will cut back production significantly as a result of 
the ISA. However, production expansion programs will probably be 
keyed to market opportunities under the ISA. 

A recently completed study, World Sugar Supply and Demand, 
1980 and 1985, provides some indication of how the tSA may foster 
this supply/demand balance. One of the objectives of the study was to 
project production, demand and area for major countries, given dif- 
ferent w r orld price scenarios in 1980 and 1985. The price scenarios 
utilized were 7, 15, and 23 cents per pound, world market basis. 

The study found that world sugar supply and demand could be in 
balance, in 1980, at 13.1 cents per pound. At prices below this level 
there would be an excess of demand over supply, while the opposite 
would be true if prices were above 13.1 cents. 3 This price is within the 
range specified by the ISA. Therefore, the study lends support to the 
belief that the Agreement could foster a balance in the world sugar 
market. 

A review of the 1978 international sweetener scene would not be 
complete without a look at high fructose corn syrup (HFCS). The 
United States, of course, is the leading producer of HFCS, but I , 
intend to only comment on production in other countries. Most of the j 
foreign production of HFCS can be found in the EC, Japan, and ; 
Canada. However, high fructose sweetener (hfs) is or soon will be J 
produced in some other countries. For example, there is a plant in / 
Singapore which has the capacity to produce 200 tons per month of 
high fructose sweetener (tapioca and sago are the main starches uti- L 
lized) ; monthly capacity may be increased to as much as 1,000 tons h< 
in 1978. It is estimated that in 1978 hfs production, outside of the ^ 
United States, will amount to about one-half million tons. Actually, ff 
installed capacity will be greater. ' ,„ 

There have been a number of studies undertaken 'to determine the ff 
future production and usage of HFCS, and its impact on sugar mar- 
kets. It would appear that, as a result of lower world sugar prices, the i 
once envisioned rapid inroads by HFCS during the latter 1970's and 
early 1980's will not occur. Among other things, investment in new > 
facilities is not an attractive use of capital vis-a-vis return rates on 
otS?*? 1611 * i in othor P ro i ects - Governmental policies may also affect E n . 
HK S production. Recent actions bv the EC relative to isoglucose 
(Which includes HFCS) are indicative of this course. 



I Mr 1985, the equilibrium prLce was found to be 15.6 cents. 



U.S. SUGAR AND SWEETENER OUTLOOK 

(By Thomas W. Little and Fred Gray, Agricultural Economists, Economic 
Research Serrice, USDA) 



INTRODUCTION 

Lower world sugar prices, the possibility of their continuance, and 
concern about their effect on producers, processors, and future sugar 
production heightened debate on national and international sugar 
policies in 1977. Interest in the discussions was high since the United 
States is a major sugar producer and also the largest importer of sugar 
from the world free market. 

With domestic sugar prices dependent upon world supply and de- 
mand conditions, the immediate concern of the trade in 1977 has been 
the potential effect of a change in policy on prices. News reflecting pes- 
simism or optimism about a change in domestic policy or a new Inter- 
national and Sugar Agreement (ISA) caused reassessments and ad- 
justments in prices and in marketing and procurement strategies of 
buyers and sellers. This paper does not attempt to recount these adjust- 
ments, but instead presents our assessment of the current supply and 
demand situation and the outlook for 1978. 

THE SITUATION 

In presenting the situation let us focus, first, on sugar production, 
consumption, imports, and prices and then move to corn sweeteners, 
minor caloric sweeteners, and noncaloric sweeteners. 

SUGAR 

Prices 

Raw sugar. — Recent price levels have been below production costs 
of most, if not all, U.S. producers. During the interval September, 
1976 through October, 1977, U.S. raw sugar prices averaged $10.79 per 
hundredweight. (New York spot basis). This level contrasts sharply 
with the average of $14.82 per hundredweight for the first 8 months of 
1976, and calendar year averages of $29.50 and $22.47 per hundred- 
weight in 1974 and 1975, respectively. With one exception, monthly 
average prices have varied by no more than $1 from the $10.79 per 
hundredweight average for the last 14 months. 

Wholesale refilled.— U.S. wholesale refined sugar prices have fol- 
lowed changes in raw sugar prices. The Chicago-West Territory beet 
price averaged $14.74 per hundredweight from August 1976 through 
October 1977. Similarly, the Northeast wholesale refined price for cane 
sugar was $16.74 per hundredweight for the same period. 

(205) 



206 



Wholesale refined sugar prices in the Chicago- West marketing ter- 
ritory were running about $4 to $4.50 above comparable raw sugar 
prices. Similarly. Northeast refined cane sugar prices have been run- 
ning about $6.50 to $7 over comparable raw sugar prices. 

Retail. — Retail sugar prices have also been relatively stable. The 
U.S. average price for October 1976 through October 1977 was 21.68 
cents per pound (5-pound package). The difference between the aver- 
age and the most extreme month was less than .007 cent per pound. 

Sugar-containing products.— Prices of sugar-containing products 
have also been relatively stable in recent months. Ice cream is an ex- 
ception, reflecting higher prices for dairy products. Similarly, retail 
prices for chocolate bars and chocolate sirup have also increased 
because of higher cocoa prices. 

Production 

Total production (domestic). — Total production of sugar in calen- 
dar year 1977 is expected to total 6.26 million tons, in contrast to 6.8 
million tons in 1976 and 6.3 million tons in 1975. 

Sugarbeets. — While sugarbeet acreage in the United States was 
down in most States, it expanded in Minnesota and Xorth Dakota — 
the Red River Valley. Harvested acreage for 1977-78 is expected to 
total about 1.24 million acres, down 16 percent from last year. The 
drop in total acreage was due to a combination of lack of water in 
i rrigated areas and low sugar prices. 

With an expected national average yield of 20.2 tons per acre, the 
sugarbeet crop is now expected to total 25 million tons — down 15 per- 
cent from a year ago. 

Beet sugar (raw sugar equivalent basis). — Beet sugar production 
from the 1977-78 sugarbeet crop is estimated to total about 3.3 million 
tons (raw sugar equivalent basis) in contrast to about 3.9 million tons 
in 1976-77. On a calendar year basis, beet sugar production in 1977 
is expected to total about 3.5 million tons, compared to an outturn of 
about 4 million tons in 1976. 

Sugarcane. — Harvested sugarcane acreage will likely total 760,000 
acres in 1977-78, up fractionally from a year ago. Acreage for harvest 
expanded slightly in Texas and Hawaii, remained the same in Loui- 
siana, and declined slightly in Florida. A projected lower average 
yield of 36 tons per acre is expected to result in a total crop of 27.6 
million tons, down 6 percent from the crop 1976. 

t <n,c svgar (raw basis). — October 1 growing conditions, sugarcane 
production currently indicated for harvest (le k ss production of seed 
cane), and a normal sugar recovery rate for each producing area now 
indicate cane sugar production in 1977-78 may fall just short of last 
year's outturn of 2.72 million tons ( raw value) /Production in calendar 
year 11)77 is expected to be down about 200,000 tons from a year ago. 

Utilization 

Deliveries. — Based on the trend for the most recent 12 consecutive 
months, calendar 1977 sugar deliveries will likely total around 11.1 
million tons (including Hawaii) compared with 10.9 million tons in 
1976. With prospects for a smaller 1977-78 beet crop, beet sugar de- 
liveries have been lagging last year's pace. Beet sugar deliveries of 



207 



2.8 million tons (raw value) for January-September were down nearly 
i 8 percent from the same period of 1976. For the year, deliveries are 
expected to total between 3.4 and 3.6 million tons, down from the 1976 
record of 3.82 million tons. 

Cane sugar deliveries of 5.74 million tons for January-September 
were up nearly 7 percent from the first 9 months of 1976. An increase 
in total demand and a decline in beet sugar deliveries increased the 
volume of cane sugar marketed. Barring unexpected developments, 
U.S. cane sugar deliveries for calendar 1977 seem likely to total be- 
tween 7.5 and 7.7 million tons (raw value) . 

Per capita consumption. — Based on the trend in deliveries for the 
first 10 months, per capita consumption of refined sugar in calendar 
1977 seems likely to total about last year's 95-pound level. This year's 
level continues the recovery beginning in calendar 1976 from the drop 
in consumption in 1975 caused by high sugar prices in 1974 and 1975. 
However, it falls somewhat short of the 97 pounds posted in 1974 and 
the 100 pounds-plus years of 1969-73. 

Imports and exports 

To satisfy our total demand for sugar, imports expand and contract. 
For the first 8 months of 1977, imports totaled 3.33 million tons (raw 
value), up nearly 9 percent from the same period a year ago. An in- 
crease in imports from foreign countries for January-August has oc- 
curred in response to : 

—more than a 12-percent drop in shipments from Hawaii and 
Puerto Rico ; 

— a 3-percent decline in deliveries of mainland grown sugar to U.S. 
refineries ; 

— a 7-percent increase in cane sugar deliveries, which reflects smaller 

beet sugar deliveries; 
— the threat of a dock strike ; and 

— an effort to keep inventory levels high in anticipation of U.S. 
raw prices increasing to a minimum of 13.5 cents per pound (New 
York spot basis) from levels of near 10 cents per pound. 

Based on the trend for the most recent 12 consecutive months, U.S. 
imports in calendar year 1977 will likely total near 5 million tons, in 
contrast to 4.66 million tons in 1976. 

During the first 9 months of 1977, U.S. sugar exports totaled about 
20,000 tons (including liquid sugar — dry basis). At this pace, calendar 
1977 exports will likely total between 25,000 to 30,000 tons, down 
sharply from the 70,000-ton level in 1976. A major reason for the de- 
cline is smaller shipments to Canada. 

Stocks 

Smaller crops and anticipation of higher domestic sugar prices 
coupled with restrictive import measures have increased the domestic 
demand for sugar stocks. U.S. sugar stocks are now at record levels. 
The October 1 level was 1.93 million tons (raw value), up over 600,000 
tons from the preceding year. Of the 600,000-ton increase, 220,000 tons 
consisted of beet sugar. Beet sugar processors, in anticipating a 15- 
percent smaller crop this fall, are attempting to carry larger stocks 
so that calendar 1978 deliveries will not be clown sharply from 1977 
deliveries. Refiners' cane sugar stock of 1.13 million tons on October 1 
were up about 50 percent from levels of a year ago. 



208 



It is now estimated that 1977 ending stocks will total about 3.7 mil- 
lion tons. This level contrasts with a level of about 2.8 million tons 
carried at year's end during the interval 1970-76. 

Ownership of stocks is not possible to determine from reported sta- 
tistics, since forward contracting, purchases for a buyer's account, and 
other marketing arrangements are not reported. Thus, it is difficult to 
estimate when and what percentage of the stocks maj 7 be drawn down 
in 1978. 

Production and consumption 

The U.S. wet milling grind in calendar 1977 is expected to total 
around 375 million bushels. About two-thirds of the recovered starch 
will be processed into corn sweeteners, the remainder sold as corn 
starch and dextrin. 

Total domestic shipments of corn sweeteners for food use are ex- 
pected to approach 3.5 million short tons (dry basis — DB) this 
calendar year, up from slightly over 3.2 million tons in calendar 1976. 

While sugar prices have slowed the increase in corn sweetener ship- 
ments this year, HFCS shipments are expected to be up over 200,000 
tons (DB). HFCS shipments in 1977 are expected to total near 1 mil- 
lion tons (DB). Conventional corn sirup (glucose) shipments are 
expected to total around 1.93 million tons (DB). up slightly from last 
year's level* And, dextrose shipments for food use will likely be around 
550,000 tons (DB) — unchanged from a year ago. 

Per capita consumption of corn sweeteners is expected to total about 
32 pounds (DB) this } T ear up from about 30 pounds in 1976. Most of 
the prospective increase will come from HFCS. HFCS consumption 
may total 9 pounds (DB) in contrast to 7 pounds in 1976. Dextrose 
consumption is expected to again total about 5 pounds (DB). Conven- 
tional corn sirup, consumption, it is estimated, will total about 18 
pounds (DB). 

Prices 

Corn sweetener prices declined significantly in July. The September 
HFCS price of $11.55 per hundredweight (DB Decatur, 111.), was 
down 6 percent from $12.32 per hundredweight in June. Similarly, 
dextrose prices in New York were down nearly 12 percent. Conven- 
tional corn sirup prices, New York basis, declined nearly 5 percent 
from June to September, while corn sirup prices in Chicago dropped 
nearly 18 percent. 

Prices of No. 2 yellow corn, the kind typically used by corn re- 
finers, averaged $1.80 per bushel in September, down 20 percent from 
the June level and nearly 30 percent from April. Declining corn prices 
have helped corn refiners offset adjustments in demand caused by 
lower sugar prices. 

While coin priees are sharply lower than earlier this year, so are 
prices of coin wet milling byproducts: corn oil is down nearly 27 
percent from June, corn gluten feed down nearly 28 percent, and corn 
gluten meal down nearly 38 percent. The decline in corn refinery bv- 
product prices conies not from the larger coin crop and lower coin 
prices but from this fall's sharply larger U.S. soybean crop and the 
resultant drop in soybean meal and oil prices with which corn re- 
finery byproduct prices compete. 



209 



OTHER CALORIC SWEETENERS 

Honey 

Honey production in 1977 will likely total around 184 million 
pounds, down 8 percent from 1976. Supporting evidence comes from 
the reported 1977 output of 101 million pounds of honey from com- 
mercial producers in 20 States with 300 or more colonies. The U.S. 
average yield of 53.3 pounds per colony for commercial producers was 
down nearly 11 percent from last 3 T ear, and there was virtually no 
change in the number of honey colonies from 1976 to 1977. 

TThile U.S. production was down this year. U.S. imports are about 
equaling last year's pace. Imports could total about 60 million pounds 
for calendar 1977. U.S. exports appear likely to total no more than 5 
million pounds in calendar 1976. If present indications for U.S. pro- 
duction, imports, and exports are about as expected, total domestic dis- 
appearance may fall onl}' slightly below last year's 260 million pounds. 

Maple simp 

U.S. maple sirup production totaled 1.22 million gallons in 1977. up 
nearly a third from 1976. Two States, Vermont and New York, ac- 
count for about 60 percent of U.S. output. 

With U.S. production up, imports are off — nearly 30 percent for 
sugar, 7 percent for sirup. 

XOXCALORIC SWEETENERS 

Both Houses of Congress recently passed an act to delay a proposed 
Food and Drug Administration (FDA) ban on saccharin for 18 
months. Differences in earlier House and Senate bills were resolved in 
a Senate-House conference, and the new act has been sent to the Presi- 
dent for his signature. 

Despite the recent uncertainty concerning future saccharin food 
use, imports for the first half of 1977 totaled 1.45 million pounds, up 
over a fourth from a year ago. If this pace continues, calendar year 
imports will likely total between 3 and 3.5 million pounds, compared 
with 2.7 million pounds in 1976. 

THE OUTLOOK 

In looking ahead to 1978, supply, demand, and product movement 
are expected to play a greater role in the market as the domestic loan 
program and the International Sugar Agreement are implemented. As 
the year proceeds, the new loan program and the ISA will be evalu- 
ated. Concerns about future domestic policy will be raised. Also, solu- 
tions to problems such as the discontinuance of the publication of the 
Xew York spot price must be satisfactorily found. 

SUGAR 

Prices 

Since September 15, sugar producers and processors have been as- 
sured a price based on the support level of 13.5 cents per pound (raw 
value) for 1977 crop sugar. This assurance first came in the form of 
a price support payment to processors. This program, however, is to 
be terminated in accordance with regulations implementing the loan 



210 



program for sugar called for in the Food and Agricultural Act of 
1977, and signed by President Carter on September 29. 

The act, to be implemented about November 8, stipulates that the 
price of sugar shall be supported at 52.5 percent of parity, but not less 
than 13.5 cents per pound (New York spot basis), and that sugarcane 
and sugar beets be supported at a level which will reflect the growers' 
equivalent share of 13.5 cents. 

Since world sugar prices are expected to remain below levels which 
would yield a domestic price of 13.5 cents through much of 1978, do- 
mestic raw sugar prices are expected to approximate the 13.5 cents 
per pound support level. 

For domestic beet growers the support price will yield a minimum 
price per net short ton of sugar beets of average quality of about $22.84. 
This return compares with an average return of $19.70 per ton in 1976. 
For domestic cane growers, the minimum price per net ton of average 
quality cane will be about $18.37 in Florida and $15.90 in Louisiana. 
These values contrast with returns of $14.90 and $12.60 per short ton, 
respectively, received by Florida and Louisiana growers for their 1976 
crop. Support prices in Hawaii, Texas, and Puerto Rico are similarly 
expected to average higher than prices received for sugarcane in 1976. 

With the L T .S. raw price soon to equal the support price of $13.50 
per.hundredweight, wholesale refined sugar prices are expected to rise 
and maintain current differentials. Retail prices can be expected to in- 
crease as well, though increases may lag wholesale price changes. Next 
year we can probably expect retail prices to be in the neighborhood of 
25 cents per pound, and relatively stable. While prices of sugar-con- 
taining products have been relatively stable in recent months, prices 
will average higher in 1978, reflecting among other things, higher 
sugar costs. The amount of increase will depend on the volume of sugar 
in each product, manufacturing costs, prices and other ingredients. 

Production 

At present we do not expect sugar production in 1978 to be greatly 
different from this year's prospective crop of 5.9 million short tons 
( raw value). The first official indication of next year's beet crop will 
be in the January report Prospective Plantings, while the first indica- 
tion of sugarcane acreage will be the quantity of seed cane planted 
in 1976, which will be reported in the January Crop Production — 
Annual. 

Returns based on the support price are expected to result in higher 
incomes for domestic sugar producers than would have been possible 
in the absence of a support program. Still, some producers in some 
regions may not cover their total costs. However, most are expected 
to more than cover variable costs. Returns from sugar oeets and sugar- 
cane may, therefore, be more attractive than alternative crops. For 
efficient producers the support price may be sufficient to promote 
some expansion. Overall, the acreage is not now expected to change 
appreciably, 

Sugar consumption 

Since sugar deliveries in 1978 are expected to again total about 11 
million short tons (raw value) and population is expanding, a decline 



211 



in per capita sugar consumption of about 1 pound is anticipated. Per 
capita consumption in 1978 is expected to total about 94 pounds. 

Imports 

Imports of foreign sugar in 1978 are now expected to total about 4.6 
million tons. In arriving at this estimate it was assumed that begin- 
ning stocks, now projected to total about 3.6 million tons, will decline 
by about 500,000 tons in 1978. If a drawdown in domestic stocks of 
this magnitude does not occur, our import requirements may be higher 
and price improvement in the world market quicker. Conversely, a 
larger drawdown will lower our requirements, and slow the recovery 
in world sugar prices. 

CORN SWEETENERS 

The wet milling grind is expected to increase about 7 percent in 
1978. Dextrose and conventional corn sirup shipments are expected to 
approximate 1977 levels. High fructose corn shipments are expected 
to increase about 20 percent. Total shipments of HFCS for 1978 are 
now projected to total about 1.2 million tons (dry basis) or 1.7 million 
tons (wet basis). 

High f ruetose corn sirup prices are expected to continue to be deter- 
mined by the price of sugar, since HFCS and sugar are close sub- 
stitutes in many industrial uses. With higher sugar prices, returns in 
the wet milling industry are likely to improve, also. 



U.S. AXD WORLD COTTON OUTLOOK 



(By Rnsseli G. Barlowe. Agricultural Economist, Economic Research Service, 

USDA) 



4k Xo man is an island, entire of itself; every man is a 
piece of the continent, a part of the main ; . . — "Devo- 
tions." John Donne, 16'2-L 

This famous quotation about human interdependence is as true today 
as when it was written in the 17th century. In a broader sense, this 
old expression also appropriately describes modern-day economic 
interdependence among- nations with regard to commodities, such as 
fibers and textiles. For instance, the domestic cotton situation must be 
considered in the context of international developments. After all, as 
shown in figure 1, the United States is one of the world's leading raw 
cotton producers, consumers, and traders. During 1976-77, we ranked 
third in global cotton production and consumption with 18 and 11 
percent of the total, respectively, and first in exports with 27 percent. 
This season, our 13.8-million-bale crop is by far the largest in the 



WORLD'S LEADING COTTON PRODUCERS, 
CONSUMERS, AND EXPORTERS, 1976/77 

MIL. BALES 

15 L PRODUCTION CONSUMPTION EXPORTS - 



21% 20% 




U.S. U.S. S R. P R C. U.S. U S S R. P R C. U.S. U.S. S R. Sudan 



PERCENTAGES ■ SHARE OF WORLD TOTAL. 
USOA NEC ERSS 2925-77 (10) 



Figure i 
(212) 



213 



(world. The United States, together with the U.S.S.R. and the PRC 
pretty well dominate global cotton production, consumption, and 
exports. 

WORLD SITUATION 

"World cotton production in 1977-78 is expected to exceed consump- 
tion for the first time in 3 years. Current projections place output at 
i record high 64.8 million bales, nearly 3y 2 million above consumption. 
Thus stocks, which dropped nearly 12 million bales during the past 2 
years to a 24-year low o,f 18.6 million on August 1, 1977, will likely in- 
crease moderately during 1977-78 and total close to 22 million by the 
i3nd of the season — figure 2. Still, next summer's carryover will be 
(relatively low, providing only about a 4-month supply for global 
textile mills. Around a 5-month supply is generally considered 
desirable. 

This season's 12-percent bigger world cotton crop reflects signifi- 
cantly larger production in the United States, U.S.S.R., Turkey, 
India. Pakistan, Mexico. Greece, Colombia, and Nicaragua. The 
United States is accounting for nearly one-half of the increase as 
relatively high cotton prices at planting time prompted U.S. farmers 
to plant over 15 percent more acreage this year. 

Meanwhile world cotton consumption during, 1977-78 may remain 
bear last season's 61.2 million bales, reflecting sluggish textile demand 
n major consuming countries and continuing intense competition 
From manmade fibers. During 1976, global manmade fiber production 
|ivas equivalent to a record-high 54 million bales of cotton, up 14 per- 
cent from a year earlier. 



WORLD COTTON PRODUCTION, USE, AND CARRYOVER 




— • ; mm — i mm ' i i i 

1973/74 74/75 '75/76 '76/77 '77/78 A '78 73 
YEAR BEGINNING AUGUST 1 



°480-POUND NET WEIGHT SALES * ENDING CARRYOVER. A ESTIMATED . 

USDA N€G ERS 2924-77 I10I 



Figure 2 



214 



This season's larger world cotton production prospects and rela- 
tively static demand have caused cotton prices in international markets 
to tumble since last spring. However, prices have exhibited a more 
stable tone in recent weeks. The Northern Europe Outlook "A" index, 
perhaps the best measure of world cotton prices, has fluctuated around 
the 58- to 60-cents-per-pound level during the past 2 months after 
dropping nearly 30 cents during the preceding 6 months. 

Some expansion in international raw cotton trade is foreseen this 
season. World exports are projected to total around 0.5 million bales 
above last season's 18.1 million. Imports by Korea and Japan, two of 
our best customers, are expected to remain sizable. However, with 
larger supplies available for export in the U.S.S.R., Turkey, Egypt, 
Mexico, and Pakistan, U.S. exports may decline a little and our share 
of global trade may slip to about 24 percent from last season's 27 per- 
cent (figure 3). 



WORLD COTTON TRADE AND U.S. SHARE 

MIL. BALES* - PERCENT 




1964 1966 1968 1970 1972 1974 1976 A 
YEAR BEGINNING AUGUST 1 

*480-POUND NET WEIGHT BALES. A ESTIMATED. 

NEG ERS 126-77 (101 



Figure 3 

The world cotton outlook for 1978-79 is highly tentative at this early 
date. If prices next spring are near current depressed levels, smaller 
world cotton acreage and production may be in the offing for 1978-79, 
even if production is subsidized in a number of countries. However, 
t hese low prices would encourage mills to use more cotton if overall 
texl fle nctivity picks up in the United States, Western Europe, and the 
Far Hast. This situation would result in an improved supply demand 
balance for cotton. On the other hand, if cotton prices recover some- 
what by next spring, thus boosting production prospects — and demand 
remains weak — a further buildup in world stocks could occur during 
the 1978-79 season. 



215 



DOMESTIC SITUATION 

Xow let's zero in on. the current U.S. fiber and textile situation. Re- 
cent trends in consumption of cotton, wool, and manmade fibers have 
generally paralleled overall economic activity. As illustrated in figure 
4, this was particularly evident during the 1974-75 recession. This year, 
however, moderate growth in gross national product and rising per- 
sonal incomes are boosting consumer purchases of household and in- 
dustrial textile products. And even though the large apparel market 
has shown little improvement in recent months, total U.S. textile sales 
are running slightly above the 1976 level. However, the impact of this 
retail activity is not being fully reflected at U.S. textile mills, as near 
record large textile imports are capturing a growing share of the 
domestic market. Imports of cotton and wool manufacturers now 
account for about one-fifth and one-half of products sold over retail 
counters, respectively. Textile imports represent about 6 percent of the 
domestic manmade fiber market. Still, I expect U.S. mills to consume 
around 12 billion pounds of fiber during calendar 1977, up about 3 
percent from last year (figure 4). 



U.S. MILL CONSUMPTION OF FIBERS 



BIL. LB. 




1965 '67 '69 71 73 75 77 



*DOES NOT INCLUDE FLAX AND SILK. ^ESTIMATED. 
USDA NEG. ERSS 2923-77 (10) 



Figure 4 

With tight cotton supplies and high prices relative to manmade 
fibers early in the year, cotton's share of this growing market is slip- 
ping. Cotton may account for a record low 26 percent of total use this 
year, compared with 29.4 percent in 1976. However, cotton's share is 
expected to rebound in 1978, reflecting larger supplies and more com- 
petitive prices. 



216 



Large crop dominates 1977-78 outlook 

Cotton prospects for 1977-78 are highlighted by sharply larger pro- 
duction, slightly weaker demand, and increasing stocks. The 31-percent 
larger crop is boosting the supply to about "16.8 million bales, the 
highest since 1973-74. But with disappearance down slightly, next 
summer's carryover could total 5y 2 *° 6 million bales, sharply above 
beginning stocks of 2.9 million (figure 5). 



U.S. COTTON PRODUCTION, USE, AND CARRYOVER 




1973/74 '74/75 '75/76 '76/77 '77/78 '78 79 

YEAR BEGINNING AUGUST 1 

+ 480 -POUND NET WEIGHT BALES. O ENDING CARRYOVER. A PRELIMINARY. 



USDA NEG ERSS 1991-77 (101 



Figure 5 

The 1977 cotton crop is the largest since 1965. Production will total 
13.8 million bales, based on October 1 conditions, up 3*4 million from 
last year and nearly 2y 2 million above the 1972-70 average. Both 
acreage and yields are up sharply, reflecting relatively high cotton 
prices last spring and favorable growing and harvesting conditions in 
major producing regions. The national average yield is estimated at 
503 pounds per harvested acre, up 38 pounds from last year and mod- 
el at ply above the average of recent years. 

With nearly ideal weather this fall, cotton harvesting is otf to a fast 
start. By early November, two-thirds of the crop had been picked, 
sharply ahead of normal and nearly double last year's pace. 

A recordbreaking 68 percent of the 1977 cotton crop is being pro 
duced in the two western regions of the Cotton Belt. In the Far West, 
production is up 16 percent, reflecting larger acreage. Although 
limited water supplies dropped yields moderately, they remain rela- 
tively high. In the Southwest, larger acreage and higher yields are 
boosting the prop 57 percent to the highest level since 1949. Moving 
eastward to the Delta, the prospective one-third increase in product ion 
is due to higher yields. However, dry weather and insect damage have 
sharply cut yields in the Sout heast. Cotton continues to lose ground in 



217 



this region, accounting for only 4 percent of 1977 U.S. production 
(figure 6). 



U.S. COTTON ACREAGE, 
YIELD, AND PRODUCTION 



UNITED STATES 




%0 
200 


F 1967 ] j 




150 




/ 




100 








1967 68 71 73 75 7' 
YEAR BEGINNING AUGUST 1 


7 



DELTA 






%OF 1967 




150 
100 


/<'' ;! \ ^ 








50 
19 


67 69 71 73 75 7 
YEAR BEGINNING AUGUST 1 


7 



SOUTHEAST 

% Of 1967 I 




1967 69 



71 73 
YEAR BEGINNING AUGUST 




Figure 6 

Low cotton prices squeeze farm income; but mill use expected to benefit 
Many U.S. cotton farmers this year are again caught in a cost-price 
squeeze. Spot market prices have dropped sharply since the crop was 
planted and in most instances are now below the total cost of produc- 
tion. Current calculations indicate a national average cost of around 



218 



55 cents per pound for the 1977 crop (including land and manage- 
ment). Although this is down about 2 percent from a year earlier due 
to higher yields per acre, costs remain relatively high. In comparison, 
SLM iy 16 -inch cotton has been selling for around 47 to 48 cents per 
pound in recent weeks, down from about 75 cents last spring. Thus, 
many producers who did not forward contract their crops this year 
may not be able to cover their total costs, although they will be able 
to cover direct costs, estimated Beltwide at around 43 cents per pound. 

Cotton producers who forward contracted their 1977 production are 
faring much better. An estimated one-fifth of the U.S. crop was 
booked ahead at an average price reportedly of around 65 cents per 
pound. Last year, about one-half the 1976 crop was forward con- 
tracted. This season's more limited contracting reflects recent rela- 
tively weak demand in the face of the large 1977 crop and the 
consequent sharp decline in cotton prices. 

The current depressed level of cotton prices is symptomatic of one 
of the most nagging problems confronting our cotton industry today. 
This problem is one of widely fluctuating cotton prices. As shown in 
figure 7, spot market prices have varied from less than 40 cents per 
pound to over 80 cents during the past 4 marketing years. Last season 
proved to be very profitable for most cotton producers as farm prices 
averaged a record-shattering 65 cents per pound, over 20 cents above 
loan and target price levels. But "what's good for the goose is not 
necessarily good for the gander" as U.S. mills ended up paying around 
80 cents a pound for cotton, 20 to 30 cents more than for manmade 
fiber staple. The result was obvious — mills switched from cotton to 
manmade fibers in an effort to cut costs. Cotton's reduced market share 
translates into an apparent loss of around 800,000 bales in domestic 
cotton consumption during calendar 1977. 



U.S. COTTON PRICES 



£ PER LB. 



80 



60 



40 



20 



Spot Market SLM 1-1/16" 

/ 




/ \ 

Loan Rate* 



I I I 1 1 1 1 I II I I I I 1 1 I I I I I I I I I I I I I 1 1 1 1 I 1 1 1 1 1 1 I 1 1 1 1 1 1 1 I 1 1 1 1 I I 1 1 1 I I I 1 1 I I 1 1 I 



1973/74 '74/75 '75/76 '76/77 '77/78 '78/79 

YEAR BEGINNING AUGUST 1 



# SIM I 1/16". AVERAGE LOCATION. 
USDA 



NEG ERSS 2597-77 (10) 



Figure 7 



219 



Figure 8 illustrates the recent divergent trends in mill use of fibers, 
while the daily rate of cotton consumption has been falling over the 
past 2 years, use of noncellulosic staple has trended up and is now run- 
ning 10 to 15 percent above year-earlier levels. Rayon and acetate staple 
consumption is up slightly. In contrast, recent monthly cotton use is 
down around 5 percent from a year ago to an annual rate of 6.3 to QA 
million bales. 



DAILY RATE OF U.S. MILL USE* 



MIL. LB. 




1974 1975 1976 1977 

YEAR BEGINNING AUGUST 1 

* SEASONALLY ADJUSTED. ON COTTON SYSTEM SPINNING SPINDLES. 

USDA NEG. ERSS 2261-77(10) 



Figure 8 

However, I do look for some recovery in cotton consumption based on 
today's more competitive prices. U.S. textile mills now are paying 
around 56 cents per pound for Middling l% B 4hch cotton. This is about 
the same price they are paying for polyester staple and moderately less 
than for rayon staple. As a result, cotton is enjoying its strongest com- 
petitive position since early 1975 (figure 9). Thus, depending on gen- 
eral economic conditions, a gradual improvement in the rate of use is 
likely during the balance of the 1977-78 season. For the year as a whole, 
U.S. mill use may total near the last season's 6.7 million bales. 

Cotton producers are seeking to bolster demand for their products 
by increasing contributions for research and promotion. Under provi- 
sions of the amended Cotton Research and Promotion Act of 1966, pro- 
ducers voted last December to contribute up to 1 percent of the value of 
each bale sold, in addition to the previous $1 per bale assessment. The 
supplemental contribution has been set at four-tenths of 1 percent for 
the 1977 crop, meaning an additional assessment of $1 per bale or so. 
As a result, Cotton Inc. has budgeted $20.5 million for calendar 1978 
upland cotton research and promotion, compared with $14 million this 
year. 

98-723—77 15 



220 



U.S. RAW FIBER PRICES 

t PER. LB. 



Cotton* 




JMMJSNJMMJSNJMMJ SNJ 



1975 1976 1977 

* MIDDLING 1-1,16" AT GROUP B MILL POINTS. ATYPE 54. 1.5 DENIER STAPLE. O 1.5 AND 3.0 DENIER. REGULAR RAYON 
USDA STAPLE. NEG. ERSS 2921-77 (10) 



Figure 9 

Although more cotton continues to be consumed in producing the 
popular corduroy and denim products, the rate of increase has slowed 
over the past year. The major reason is increased blends which now 
account for over a fourth of total denim fabric output. Still, about 90 
percent of all fibers used in making denim is cotton. 

Another source of concern for the cotton economy is textile imports. 
As mentioned earlier, about a fifth of U.S. demand for cotton goods 
this year is being satisfied by imports, which may total just slightly 
below 1976's record high iy 2 million equivalent bales of raw cotton. 
However, it must be kept in mind that many of these imports are made 
from U.S. cotton. For instance, practically all raw cotton consumed in 
Korea, half in Taiwan, over a third in Japan, and a fourth in Hong 
Kong, is imported from the United States. 

Exports of U.S. cotton textiles are also running at relatively high 
levels. Shipments during 1977 may nearly match last year's 0.86 mil- 
lion equivalent bales. Still, the net import textile trade balance remains 
large (fig. 10). 

Future U.S. textile trade will be governed not only by economic 
conditions here and abroad but also by international trade agreements 
now being hammered out. The Multi-Fiber Arrangement (MFA), the 
3-year old international umbrella that sanctions bilateral quota re- 
strictions between nations, expires December 31. The United States is 
supporting a renewal of the MFA with little change. The proposed 
MFA would continue to allow an overall growth rate in textile imports 
of 6 percent but would allow more severe restrictions to protect heavily 
import -impacted items. The United States now has 18 bilateral agree- 



221 



COTTON TEXTILE TRADE 




1960 '63 '66 '69 72 75 A 78 



*480-POUNO RAW COTTON EQUIVALENT BALES. A ESTIMATED 
USDA MEG ERS 2262-77 (101 



Figure 10 

ments with other nations, 11 of which are up for renewal now and 7 
more in the next 2 years. As of early November, a bilateral pact had 
been concluded with Hong Kong and one had been reached in prin- 
ciple with Korea, two of our major sources of textile imports. 

Export prospects 

Kelatively strong foreign demand for U.S. cotton during 1976 and 
early 1977 resulted in exports of 4.8 million bales during the 1976-77 
season and sales of over 4 million for delivery this season. Between 
January 1976 and July 1977, net U.S. export sales averaged about 0.5 
million bales per month. However, sales have slowed since early August 
reflecting large competitive supplies of foreign cotton and less compet- 
itive U.S. cotton prices in international markets (fig. 11) . 

U.S. cotton export prospects for the 1977-78 marketing season are 
highly uncertain at the moment. There are now two widely differ- 
ing viewpoints being debated. One scenario points to the current rel- 
atively large U.S. export commitment of 4% million bales and argues 
that even if net sales during the balance of the season remain near the 
depressed August-October level, shipments will amount to 5 million 
or more. However a more pessimistic stand is taken by those who main- 
tain that exports will total 4 million bales or less, based on anticipated 
foreign cotton consumption of nearly 55 million and production of 
around 51 million. This scenario, unlike the previous one, assumes that 
any stock rebuilding abroad will be accomplished with cheaper foreign 
growths. 



222 



i 

U.S. COTTON EXPORTS AMD PRICES 



C PER. LB. 




1972 1973 1974 1975 1976 1977 

YEAR BEGINNING AUGUST 1 

* C.t.F. NORTHERN EUROPE. 

USDA MEG EKS 22G3 77 1 10) 



Figure 11 

I think that these two scenarios pretty well bracket U.S. cotton ex- 
port possibilities for this season. I come out somewhere around the 
middle of this range, or about 4% million bales. Of course, the oast 
and gulf coast dock strike against container ships, which has had 
minimal impact on cotton exports so far, could reduce shipments if 
it should continue for several months or become more general. 



223 



OUTLOOK FOR 197 8-7 9 

Xow let's shift our thinking to the outlook for next season. As I 
stated earlier, we can look for a larger U.S. cotton carryover next 
summer, probably in the range of 5y 2 to 6 million bales. However, a 
smaller 1978 crop is a distinct possibility. On the demand side, I fore- 
see moderately larger U.S. mill use along with perhaps slightly smaller 
exports. 

Production prospects 

The quantity of cotton produced in this country next year will de- 
pend on a number of factors, including the price of cotton relative to 
competing crops such as soybeans and grain sorghum, weather, and 
legislative program provisions. At this early date, it is difficult to pre- 
dict commodity price relationships at planting time next spring and 
even more difficult to guess the weather. The new legislation even in- 
jects some uncertainty as to how farmers will make their planting- 
decisions. 

Just as Detroit has recently introduced its new 1978 model automo- 
biles, a new-model farm bill has just rolled off the assembly line. It 
comes equipped with some of the same basic features as the 1973 model 
along with a few new-fangled gadgets designed to promote greater 
price stabilitv. Congress has named this new vehicle, the "Food and 
Agriculture Act of 1977." 

tinder the 4-year upland cotton program, the national average loan 
rate for SLM 1%6-inch cotton will be set at the lower of (1) 85 per- 
cent of the domestic price of such cotton during the 4 preceding mar- 
keting years or (2) 90 percent of the average adjusted price for the 
first 2 weeks of October of the 5 lowest quotes for SM 1%6-inch cotton 7 
c.i.f., northern Europe. For the 1978 crop, the loan rate has been set 
at 44 cents per pound based on the latter calculation, compared with 
44.63 cents for the 1977 crop. 

The program is designed to smooth out some of the peaks and val- 
leys of future cotton price levels by adjusting raw cotton import 
quotas and the length of time producers are permitted to hold cotton in 
the CCC loan. For instance, when the average spot market price of 
SLM 1%6-inch cotton is less than 130 percent of the average price of 
such cotton for the preceding 36 months, producers may request an 
8-month extension to the present 10-month loan period. At other times, 
when prices are high, a special world import quota for a 21-day do- 
mestic mill supply of cotton will be opened up for 90 days. Based on 
recent daily rates of consumption, this quota would be slightly over 
500,000 bales. Currently, the annual quota for upland cotton stapling 
less than iy 8 inches is 30,200 bales and has not been filled during most 
recent years. 

The target price for upland cotton will be about 52 cents per pound 
for the 1978 crop, up from 47.8 cents for the 1977 crop. Thereafter* 
each year's target price will be based on the previous year's level and 
adjusted by changes in production costs per pound, excluding land and 
management. All program benefits will be tied to planted acres rather 
than the old allotment system. 

The Secretary of Agriculture has the authority to require a maxi- 
mum set-aside of cotton equal to 28 percent of planted acreage. For the 



224 



1978 crop, no decision has been reached although this matter is receiv- 
ing close attention. The Secretary also is authorized to offer pay- 
ments to fanners to divert cropland to conserving uses. 

Total deficiency payments to upland cotton, wheat, and feed grain 
producers will be limited to $40,000 per producer in 1978, $45,000 in 
1979, and $50,000 in 1980 and 1981. Rice payments will be included 
in the limitation for 1980 and 1981. Total payments are currently lim- 
ited to $20,000 per producer. 

The legislation provides for a disaster payment program for the 
1978 and 1979 upland cotton crops. Disaster payments will not be 
subject to payment limitations as in past years. 

So what about cotton production prospects for the 1978 crop? Let's 
talk first about acreage. Prices for both cotton and competing crops 
have declined since last spring with cotton experiencing the sharpest 
drop. Thus, if current price relationships prevail at planting time, 
acreage seeded to cotton next spring could drop considerably below 
this }^ear's level. The big question surrounding 1978 acreage centers in 
Texas and Oklahoma, where about one-half the 1977 U.S. cotton crop 
was planted and where grain sorghum is the major competitor. Al- 
though sorghum prices also are relatively low now, the new program 
could affect the competitive position of cotton and sorghum in this 
area. The fact that the 1978 target price for sorghum will be based on 
its cost of production rather than on its relationship to corn will give 
sorghum a competitive edge. On the other hand, much will depend on 
set-aside requirements for the two crops. For example, a required set- 
aside for sorghum without one for cotton could discourage sorghum 
acreage. All in all, somewhat smaller cotton acreage in the Southwest 
is likely next spring. 

Less cotton may also be planted in other regions. However, in the 
Far West, cotton acreage is expected to remain at a relatively high 
level if the water shortage does not worsen. Moving eastward, cotton 
acreage in the Delta may decline only slightly in view of the recent 
weakening in soybean prices, which have generally paralleled the de- 
cline in cotton prices. Also, cotton acreage in the Southeast may slip 
further if weather and insect problems continue to boost production 
costs. In summary, given current price relationships between cotton 
and competing crops, U.S. farmers may plant 11 to 13 million acres of 
cotton in 1978, compared with over 13.4 million in 1977. 

Prospective 1978 cotton yields are another big uncertainty. Fickle 
weather during the past decade has caused yields to fluctuate from a 
low of 434 pounds per harvested acre in 1969 to a high of 520 pounds 
in 1973. This year, yields are averaging a relatively high 500 pounds 
per harvested acre. As illustrated in figure 12, if we assume 1978 
planted acreage totals around 12 million acres, production next sea- 
son could range from 10y 2 to 12 million bales, depending on yields. For 
instance, if yields should average around a bale per harvested acre, 
production would total a little over 11 million bales. 

Disappearance prospects 

Two factors will prove of paramount importance to U.S. mill use 
of cotton in 197^-79. General economic and textile activity will heavily 
influence < Lo total fiber market, as will imports of textile products. 



225 



1978 U.S. COTTON PRODUCTION 
AT VARIOUS YIELDS 

MIL. BALES 




I 1 10 

* PER HARVESTED ACRE. ASSUMING NORMAL ABANDONMENT. 
USDA NEG. ERS 2627-77 (10) 



Figure 12 

The second major factor will be the price competitiveness of U.S. cot- 
ton in domestic fiber markets. The recent decline in cotton prices has 
greatly improved its position relative to manmade fibers. This means 
that cotton use should be on the upswing as we enter the 1978-79 season. 
As a result, cotton use next season could total as much as 0.5 million 
bales above 1977-78's anticipated 6.7 million. 

U.S. cotton export prospects for 1978-79 are not as bright as for 
the current season. Although foreign cotton consumption may again 
exceed production by 3 to 5 million bales, U.S. cotton will likely 
face increased competition from other exporting nations. As a result, 
foreign demand for U.S. cotton may not match this season's expected 
4.4 million bales. 

Despite smaller export prospects, however, U.S. disappearance could 
exceed production, meaning that stocks may fall slightly during 
1978-79. 

Over the longer run. I'm generally optimistic about the future of 
cotton. I believe that total fiber demand will continue to expand and 
cotton will share in this growth. Cotton has a vital role to play in 
satisfying future demand, whether it is for an all-cotton jean or towel, 
or a blended bedsheet or shirt. 

All this is not to say that cotton's future will be void of problems. 
Despite international trade agreements, foreign produced textile 
goods will continue to be imported in large quantities. And manmade 
fiber producers will intensifv their efforts to make further inroads 
into cotton's markets. Hope'fully, the new legislation will promote 
more stable cotton prices, which would be a definite plus for cotton 



226 



in its competitive battle with manmade fibers. However, future cotton 
use could suffer at the hands of manmade fibers if new cotton dust 
standards now being readied by the Occupational Safety and Health 
Administration to combat the hazards of byssinosis or brown lung 
disease prove to be too costly to the textile industry. Still, I'm con- 
fident that we can overcome these problems as we have in the past 
and continue to supply American and foreign consumers with the best 
fiber and textile products produced in the world. 



IMPACT OF NEW LEGISLATION : A FARMER'S OUTLOOK 

(By C. Hoke Leggett, Chairman, Producer Steering Committee, National Cotton 

Council) 



My assignment this afternoon is to discuss the implications of new 
cotton legislation, farmer's reaction to it, and then how that may in- 
fluence cotton production next year. 

You realize, of course, that while I serve as Chairman of the Pro- 
ducer Steering Committee of the National Cotton Council, and on the 
Council's Board of Directors as the producer director-at-large, my 
ability to see into the future is limited. My crystal ball, so to speak, 
is a little cloudy. 

First of all, there are many aspects of the new legislation which are 
untried and untested, and which are going to be confusing to farmers. 
For example, cotton producers will hear for the first time of a "Na- 
tional Program Acreage", a "National Reduction Percentage" and an 
"Allocation Factor". For the first time in many years, he will not 
receive a notice of his farm allotment, nor will be know in all cases 
how many acres he can expect to plant and have eligible for price 
support payments. Payment limitations were increased from $20,000 
to $40,000, and for the first time ever, payments which represent com- 
pensation for a disaster loss are not included in the total. For the first 
time ever, disaster payments may be paid on the total acreage of cotton 
planted on the farm, not just the farm allotment, but the payment is to 
be calculated at different rates and under different conditions of 
eligibility. 

The CCC cotton loan for 1978, for the first time in history, has 
been computed on the basis of the current world price, and the loan 
rate has declined from 44.63 cents in 1977 to 44 cents for 1978. For 
the first time, under certain circumstances, the law provides for special 
import quotas and an option on the part of the producer to extend 
the CCC loan period from 10 to 18 months. For the first time in several 
years, farmers are faced with the possibility of set-aside acreage re- 
quirements. Cross-compliance between commodities as a condition of 
eligibility for loans or payments is brand new. New, stricter regula- 
tions make set-aside more expensive than formerly, possibly forcing 
some farmers entirely out of the set-aside crops into crops which have 
no set-aside. 

Frankly, I'm afraid that the average farmer's reaction to the new 
cotton program will be one of utter confusion, unless the Department 
can carry a good information program to the farmer before planting 
time. 

Let me give you a personal example. I produce cotton on my larm in 
North Carolina. Because of my involvment in the legislative process 
as an officer of the Producer Steering Committee. I am reasonably 



(227) 



228 



knowledgeable about the new cotton program. But I also produce 
wheat, corn, soybeans, tobacco, and peanuts on my farm. Most of 
the grain is marketed through our own sow-hog operation. Like most 
farmers today, mine is a highly diversified business, so we are con- 
cerned not only about the provisions of law and the regulations which 
apply to cotton, but to the interrelationships which exist between the 
loan levels, set-aside requirements, and market prices of a variety of 
agricultural products. The market price of corn directly affects my 
cost of producing pork. A large set-aside in wheat and feed grains 
may cause a shift in acreage to soybeans or cotton, with a resulting 
pressure on prices of these commodities next fall. All of these are fac- 
tors which I must consider at planting time next spring if I hope to 
maximize profits. And make no mistake about it, potential profit — 
the bottom line — will be the greatest influence on farmer's planting 
intentions from California to the Carolinas next year and every 
year. 

To further compound the problem, we must recognize that while 
there are less than 90,000 active cotton producers left in the United 
States, they are scattered over 18 States. They have countless varia- 
tions of weather conditions, water supply, insect populations, tillage 
requirements for wind and water erosion control, growing seasons, 
and on and on. Roughly the western half of the Cotton Belt is irri- 
gated ; cotton in the eastern half is rain grown. 

There are very few comparisons one can make between the 50,000 
acre cotton producer in the San Joaquin Valley of California, and a 
grower with 50 acres or less in Alabama. Yet each man represents a 
part of the system which is important to the industry, and each must 
have an understanding of the new program and its requirements be- 
fore he can make an intelligent choice in 1978. 

You see why my crystal ball is cloudy. With so many unknowns, 
how can anyone accurately predict a planted acreage 6 months from 
now ? What will the price of cotton be next April, and how will that 
compare to the price of corn, or grain sorghum, or soybeans? How 
much will the price of fuel increase, to drive the tractors and the irri- 
gation wells? Will a supply of insecticides be available that will con- 
trol the bollworm-budworm complex? At what price? Will the Sec- 
retary's announcements of national program acreages in coming 
months affect prices? 

I can't answer those questions. Five months from now, depending 
on the answers, I'll be in a better position to tell you how farmers 
will react at planting time. 

Today, I can give you my reaction to what 1 hear farmers across 
the country saying. Cotton farmers, I believe, are generally pleased 
with the new bill. While opinions vary somewhat depending on geo- 
graphical location, cost of production, and available alternative crops 
a farmer can plant, most producers believe the bill is about as good 
as could be had under the circumstances. Farmers were particularly 
pleased about the increase in the payment limitation from $20,000 
to $40,000, the increased protection against disaster losses, and the 
option to extend the CCC loan to 18 months. 

While very few if any of us expected the loan rate to drop to 44 
cents in 1978, cotton leadership for the past several years has insisted 



229 



that the loan level should not interfere with U.S. cotton's competitive- 
ness in world markets. We've seen a graphic demonstration this fall 
that this bill fully meets that test. The target price, at 52 cents per 
pound for 1978, is based on the cost of production, and most farmers 
believe that philosophy is sound. The new bill is designed to provide a 
more stable price structure, and to moderate violent fluctuations which 
have eroded cotton's markets in prior years. It allows the farmer 
freedom to plant, to adjust acreage up or down as the market dictates, 
and at the same time, offers a greater degree of protection from world 
price disruptions and adverse weather conditions. It establishes the 
loan strictly by formula, so that everybody can figure what it's going 
to be, thus eliminating any political influences. 

Overall, Mr. Chairman, I believe it is a good bill, and I believe most 
farmers, if they understand it, agree with me. It would help, of course, 
if we could improve the price of cotton a few cents. With cotton sell- 
ing below the average cost of production, cotton farmers are not going 
to be enthusiastic about any farm bill. 

In summation, there are several significant changes in the farm 
bill that could affect cotton production next year — the level of the 
loan, the 8-month loan extension, set-aside requirements, disaster pay- 
ments, a target price substantially higher than the loan, and higher 
payment limits. 

In my judgement, however, comparative market prices next spring 
of cotton, soybeans, and grain sorghum, will be the major influence in 
the determination of cotton acreage next year. 



U.S. OILSEEDS AND PRODUCTS OUTLOOK 

(By George W. Kromer, Agricultural Economist, Economic Research Service 

USDA) 



The 1978 outlook for U.S. oilseeds is highlighted bv the record large 
supplies produced from this fall's harvest. Both domestic and export 
demand likely will increase, but not nearly as much as output. In early 
November, prices for most oilseeds, oils, and high-protein meals were 
below year-earlier levels but in contrast to the sharp rise which oc- 
curred last year, a much steadier price pattern is expected. Prices next 
spring and summer will be influenced by the prospects for 1978 oil- 
seed crops, as well as international developments. 

The United States harvested 76 million acres of oilseeds this year, 
12 million more than in 1976. About three-fourths of the increase (9 
million acres) were in soybeans with smaller gains in cottonseed, sun- 
flowerseed, and flaxseed. Peanut acreage remained unchanged from 
last year's level. Total production for the 5 major U.S. oilseed crops is 
forecast at 53 million metric tons, 30 percent more than in 1976. 

SOYBEAN SUPPLIES RECORD LARGE 

Increased acreage coupled with higher yields has resulted in record 
soybean production this year. As of October 1, the U.S. crop was esti- 
mated at 1,647 million bushels, up 30 percent from last year. And with 
carryover stocks last September 1 at 103 million, this pushes the total 
1977-78 soybean supplv to 1.75 billion bushels, up from 1.5 billion in 
1976-77. 

With record supplies and lower prices, soybean use is expected to 
expand to around 1.54 billion bushels, a tenth above last season. Both 
domestic crushings and exports are expected to increase, although not 
nearly as much as supply. Consequently, carryover stocks on Septem- 
ber 1, 1978, are expected to exceed 200 million bushels, more than 
double this past September's low level. 



SOYBEAN ACREAGE HARVESTED 



MIL. ACRES" 




U.S. SOYBEAN YIELD PER ACRE HARVESTED 




(230) 



231 



HARVEST PRICES BELOW 1976 

Reflecting increased supplies and lagging demand early in the 
season, prices received by soybean .farmers in mid-October fell to $4.8o 
per bushel, 34 cents below September and more than $1 below October 
1976. Prices have increased some since, due to the slower than normal 
harvest, a sharp pickup in domestic and export demand for soybeans, 
and the reduction in the Soviet grain crop. Some price strengthening 
may occur after harvest but much will depend upon farmers' willing- 
ness to store soybeans and/or place them under CCC loan, and on the 
competition from Brazil and other major world oilseed producers. 
Prices received by farmers for all of 1977-78 are forecast to average 
about $2 below last year's $7 season average. 



U.S. SOYBEAN OUTPUT AND CARRYOVER 

BIL. BU. ~ " 



1.5 h- 
\)2 p 
9 - 
6 - 
3 - 



1971 1972 1973 1974 197S 1976 1977 1978 1379 
YEAR BEGINNING SEPTEMBER 1 



U.S. SOYBEAN PRICES 

$PER BU. 




1966 1968 1970 1972 1974 * 1976 1977 
YEAR BEGINNING SEPTEMBER 1 



The U.S. average loan rate for 1977-crop soybeans is $3.50 per 
bushel. A large number of soybeans likely will be placed under CCC 
loan although actual deliveries to the CCC probably will be small. 
Producers use CCC loans as a source for relatively low financing costs. 



CRUSHIXGS TO INCREASE 

Soybean crushings this season are expected to total around 850 
million bushels, compared with the 790 million processed m 1976-<7. 
This rise mainlv reflects the prospective increase in soybean meal 
feeding due bo lower prices and rising livestock/poultry production. 
The crush got off to a slow start in September-October but is expected 
to move well above vear-earlier levels as meal demand expands. 

A crush of this size would utilize only about two-thirds of the in- 
dustry's 1977-78 processing capacity— now estimated at 1.25 billion 
bushels, up slightlv from last season. While the industry also operated 
at two-thirds capacity in 1976-77, the long-term average utilization 
rate is 80 percent. 

EXPORTS MAY REACH NEW HIGHS 

Sovbean exports in 1977-78 are projected at around 610 million 
bushels, compared with 564 million last season. Lower L .S. prices ana 
increased meal demand overseas will provide the impetus tor larger 
exports, despite increased competition from South American soybeans 
and mea 1. U.S. inspections for export from September 1 through Oc- 
tober 28 totaled 74 million bushels, a shade below 1976. However, the 



232 



pace has picked up with a record high 25 million bushels moving out 
in the last week of October. 

Increased overseas demand for protein meals is expected in both 
Western Europe and Japan as feeding of hogs and poultry continues 
to increase. Also, high feed grain prices in the EEC should encourage 
more liberal feeding of protein meals. Export projections assume that 
the U.S.S.R. will take around a million metric tons of U.S. soybeans, 
about as much as in 1976-77. 

The United States will face stiffer competition in the world's oil- 
seed markets in 1978, with larger supplies of Canadian rapeseed, So- 
viet Union sunflowerseed, Indian peanuts, Malaysian palm oil, Peru- 
vian fish meal, as well as more soybeans and products from South 
America. 

197S SOYBEAN ACREAGE MAT DECLINE SLIGHTLY 

Soybean acreage in 1978 will be influenced by other factors in addi- 
tion to the usual ones such as weather and price relationships with 
competing crops. Following the record planted acreage this year and 
the lower farm prices for 1977-crop soybeans, it would appear that 
acreage next year should decline slightly. However, with corn prices 
also sharply lower, soybean prices should remain attractive and com- 
petitive, perhaps at a price ratio of about 2Vo to 1. 

Also, the set-aside program for feed grains — if initiated — will be 
an additional element which farmers will need to factor into their 
cropping plans. Another important economic variable will be the soy- 
bean loan level for 1978. If the loan rate is raised significantly above 
the $3.50 per bushel of this season, farmers may respond with increased 
acreage. 

Xevertheless, with corn loan and target prices for 1978 at $2 and 
$2.10 per bushel, respectively, there may be only a slight shift in soy- 
bean acreage from the record 59 million acres planted this year. Soy- 
beans could gain in the South at the expense of cotton but possibly 
would lose to corn in the north central area. 

SOYBEAN OIL COMPETITION STIFFENS 

U.S. soybean oil supplies in 1977-78 are expected to exceed 10 bil- 
lion pounds, some 5 percent above last season. 

Domestic use of soybean oil is expected to total around 7y 2 billion 
pounds in 1977-78, up slightly from last year. However, soybean oil 




233 



will face increased competition from domestically produced cotton- 
seed and sunflowerseecl oils, as well as larger supplies of imported palm 
oil, and price spreads between these oils probably will be smaller than 
in 1976-77. Domestic use of soybean oil was oif last season because 
high prices caused some consumers to limit purchases of food fat prod- 
ucts while some food processors drew down inventories. 

Soybean oil exports in 1977-78 are projected at around 1.4 billion 
pounds, down from the 1.55 billion shipped last season. The prospec- 
tive decline mainly reflects reduced shipments to India because of that 
country's improved production of oilseeds this year. U.S. soybean oil 
will face stiff competition abroad because of increased world supplies 
of oils. Program activity for food aid is also a major factor in the level 
of U.S. exports of vegetable oils. More than one-third of the 1977-78 
soybean oil exports is expected to move under P.L. 480 programs (titles 
I and II) . About 412 million pounds (187,000 metric tons) of vegetable 
oils have been allocated under title I, P.L. 480, for 1977-78, mainly for 
Pakistan, India, and Bangladesh. 

Soybean oil prices (crude, Decatur) fluctuated widely during 1976- 
77. Prices tended upward from 21 cents per pound early in the season 
to a peak of 31 cents in May. Prices then fell sharply during the sum- 
mer and by season's end were about 19 cents. 

Prices during the 1977-78 marketing year are expected to be rela- 
tively more stable than last season — possibly averaging near 18 cents 
per pound compared with a 24-eent average in 1976-77. Increased 
competition from other sources of vegetable oils both here and overseas 
will keep pressure on U.S. soybean oil prices. Prices in early November 
at 19 cents were 3 cents below year-ago levels. 

SHARP EXPANSION IN SOYBEAN MEAL USE IN PROSPECT 

U.S. soybean meal supplies in 1977-78 probably will total around 
20y 2 million short tons, compared with 19 million last year. 

Domestic use of soybean meal is projected at around 15% million 
tons, up more than 1 million from 1976-77. The increases in hog num- 
bers (up 9 percent from a year ago) , broiler production (up 6 percent) , 
cattle on feed (up 6 percent) , and small gains in milk and egg produc- 
tion (2 percent) all point to heavier consumption of high-protein feeds 
in 1977-78. In addition, feed use of corn and other grains is expected 
to increase some 6 percent, which will also stimulate the demand for 




234 



soybean meal. Furthermore, soybean meal will be more competitively 
priced relative to corn this year than last, based on relative feed values. 
This should lead to higher use of protein meals per animal unit. 

Soybean meal exports are expected to increase slightly from the 4.6 
million tons shipped in 1976-77. The bulk of U.S. soybean meal moving 
abroad is in the form of soybeans rather than the processed commodity. 
But Brazil is trying to export more soybean meal and oil while crush- 
ing more beans at home. 




Increased supplies of soybeans and meal in 1977-78 are expected 
to result in meal prices averaging sharply below last season's $200 
per ton level — perhaps around the $135 level. Soybean meal prices (44 
percent protein, Decatur) during 1976-77 fluctuated widely, the 
monthly average varying between $140 and $273. 



PALM OIL IMPORTS MAY INCREASE 



U.S. palm oil imports may rise from last season's 661 million pounds 
to possibly around 800 million pounds. Continued expansion of 
Malaysia's palm oil production should put larger quantities on the 
world market. Their production for 1978 is projected at a record large 
1.7 million metric tons against an estimated 1.5 million in 1977 and 
l f 3 million in 1976. U.S. imports in 1976-77 declined a fourth from the 
record of 933 million pounds the year before. Because of dry weather, 
1977 production in Malaysia was not as large as expected. Also, other 
importing countries bought larger quantities. In addition, soybean 
oil prices were competitive with palm oil over most of the season — 
which discouraged U.S. palm oil imports. 

This year, with larger domestic supplies of both soybean and cotton- 
seed oil at lower prices, competitive price relationships fnay well be the 
major determinant affecting the level of U.S. palm oil imports. If 
Malaysia decides to export more oil to the United States, she can 
undersell soybean oil by a couple of cents and still show a profit. 

If imports are near expectations, domestic disappearance of palm 
oil may increase to about 750 million pounds, roughly 125 million 
above 1976-77. Over two-thirds of the total utilized last year was 
in the production of shortening. Smaller quantities were used in mar- 
garine and salad and cooking oil production. 

Palm oil prices (ci.f. U.S. ports, bulk) during 1976-77 averaged 
about 2 1 cents per pound, approximately the same as soybean oil prices. 



235 



The}' ranged from a low of 19y 2 cents to a high of 29 cents. Currently 
prices are quoted at about 20 cents and they should be more stable 
this year, reflecting larger world supplies of fats and oils. 

COCOXUT OIL IMPORTS MAT DECLIKE 

During 1977-78, U.S. imports of coconut oil may total around 1 
billion pounds, down from last year, due to reduced output in the 
Philippines — the source of virtually all of our coconut oil. 



U.S. PALM OIL IMPORTS 

MIL. LB. 



I I I I I I I 



YEAR BEGINNING OCTOBER 1 



U.S. COCONUT OIL 



LB. 


SUPPLY I 




















■ ' ■ ' ■ ■ 


— , 




963 IS 


68 1973 19 
YEAR BEG 



MIL. LB 

1.200 
1.000 
800 



C°S APPEARANCE* 



- I 


k - 










— : 




m - 



Domestic disappearance last season totaled about 1.1 billion pounds, 
a tenth below the year before, reflecting reduced use in shortening, 
margarine, and other edible products. This season, disappearance 
may decline slightly as larger domestic supplies of food fats and oils 
tend to constrain use in these outlets. 

Coconut oil prices (crude. Pacific Coast) averaged 28 cents per 
pound during 1976-77. up sharply from the 18 cents of the previous 
year. Prices rose from about 23 cents earl}' in the season to around 37 
cents in April, then weakened, and in early November were at the 24- 
cent level. With Philippine copra production expected to total near 
or below last year, coconut oil prices are expected to remain firm rela- 
tive to other oils and fats prices. 



COTTOXSEED OUTPUT LARGEST SINCE 19 72 



Due to large acreage and higher yields, the 1977 cottonseed crop 
totals an estimated 5.2 million short tons, a fourth above 1976 and 
the largest since 1972. 

Cottonseed prices are down sharply, reflecting the large cotton- 
seed supply coupled with generally weaker prices for most oilseeds. 
Prices received by farmers in August-October averaged $76 per ton, 
about $21 below a year ago. The combination of larger cottonseed 
supplies and increased supplies of vegetable oils and proteins likely 
will keep downward pressure on cottonseed prices. 

Cottonseed oil supplies for the 1977-78 marketing year may total 
1.7 billion pounds, roughly a third above last season and the largest 
since 1973-74. This buildup alloAvs for an increase in both domestic 
disappearance and exports. 

Domestic disappearance probably will total about 0.7 billion pounds, 
roughly 0.2 billon pounds above last year. Lower prices, along with 
the expanded supplies, should encourage usage. Nevertheless, cotton- 

9S-723— 77 1G 



236 



U.S. COCONUT OIL IMPORTS 

MIL. POUNDS 

1.200 - 




U.S. COTTONSEED ACREAGE AND PRODUCTION 

MIL. TONS 



Harvested Acreage 




seed oil will face increased competition from larger supplies of soy- 
bean oil, sunflowerseed oil, palm oil, and lard. 

Cottonseed oil exports, which have been surprisingly strong in re- 
cent years; may approach 0.7 billion pounds, an increase of about 6 
percent. U.S. cottonseed oil enjoys a good market overseas, especially 
in Egypt, which is our major customer. However, with world supplies 
of fats and oils on the increase, cottonseed oil will also face increased 
competition abroad. 

World production of cottonseed in 1978 may rise to 26 million metric 
tons, up 9 percent from this year. In addition to the increase from the 
United States, expanded production is expected in Mexico, Brazil, the 
U.S.S.R., the People's Kepublic of China, India, and Pakistan. 

Domestic cottonseed oil prices (crude, Valley), which averaged 25 
cents per pound in 1976-77, may be substantially lower this season. 
Prices skidded from a monthly average of 31 cents last May to 20 
cents in September. At 20 cents in early November, cottonseed oil was 
priced about the same as soybean oil. 

Cottonseed meal supplies for the 1977-78 marketing season total 
an estimated 2.3 million tons, roughly 40 percent above last year. 

Domestic disappearance probably will exceed 2 million tons, up 
sharply from the 1.5 million of 1976-77. With the bulk of cottonseed 
meal used as dairy and beef cattle feed, lower meal prices and increas- 
ing livestock numbers, particularly cattle in feedlots, should serve to 
boost meal usage. 

Cotton meal prices (41 percent protein, Memphis), which averaged 
$185 per ton during 1976-77, should be substantially lower this year. 



LARD OUTPUT POINTS UP 

Lard production in the 1977-78 marketing year which began Oc- 
tober 1 is expected to expand nearly a tenth from the 1.1 billion pounds 
of 1976-77, due mainly to increased hog slaughter. Slaughter, expected 
to run strong through most of the season, could be 7 to 8 percent above 
the previous year. Lard yields, which averaged pounds in 1976- 
77, may be off slightly again. 

The 1.1 billion pounds of lard produced last year reversed a 2-year 
down! icnd and the upward movement is continuing in this marketing 
year-. The June August 1977 pig crop was 7 percent above the same 
period a year ago. Sows farrowing during September-November are 



237 



COTTONSEED OIL 




expected to be up about a tenth. Farrowing intentions during Decem- 
ber 1977-February 1978 are expected to be up 11 percent. Thus, hogs 
available for slaughter will exceed the previous year through most of 
the marketing season. 

Domestic disappearance may increase slightly from the 0.8 billion 
pounds of last season, which was the lowest on record. While direct 
use of lard probably will decline, in line with the long-run downtrend, 
its use in margarine and shortening manufacture may increase if lard 
prices remain competitive with other major fats and oils. 

Exports and shipments of lard may increase slightly from the 0.2 
billion pounds of last year, and lower prices should help keep U.S. 
lard competitive. 

The United Kingdom is a major outlet for U.S. lard; other large 
markets include Canada, Mexico, and various countries in South 
America. 

Last season, lard prices (tanks, loose, Chicago) averaged 21 cents 
per pound, ranging from 26 cents per pound last May to 19 cents in 
September. While prices this season likely will exhibit a more stable 
pattern, they will remain under pressure as production of fats and 
oils resumes momentum. 

FLAXSEED PRODUCTION DOUBLES 

The 1977 flaxseed crop is estimated at 16 million bushels, more than 
double the 1976 crop. Sharply expanded acreage and improved yields 
account for the increase. Acreage for harvest, at 1.5 million acres, is 
up over 50 percent. Eoughly four-fifths of this acreage increase 
occurred in North Dakota. Yields per acre, at 11 bushels, are up over 3 
bushels. With added carryover and imports, total supplies for the 
1977-78 marketing year, which began June 1, are about 20 million 
bushels, a third above the small supply of the previous season. 

Flaxseed crushings may total 12 to 13 million bushels, about a 
tenth above last year. Thus, sharply lower prices should encourage 
crush activity, which hit a record low last year. Although flaxseed 
crushings are in a long-term downtrend, in some years they reverse 
trend, especially when supplies expand and prices fall. 

Flaxseed exports may increase slightly from the 0.2 million bushels 
of last season. However, competition from foreign flaxseed producers 



238 




will be stiller. Argentina's 1977 flaxseed crop, at 850,000 metric tons, 
is up about a third and the largest in more than a decade. 

During June-October, prices received by farmers for their 1977- 
crop flaxseed averaged $4.46 per bushel, about $2.65 below the same 
period last year. Eeflecting the larger supplies, as well as greater out- 
put for most major oilseeds, flaxseed prices declined from $7.47 last 
April to $3.71 in September. They have since increased but prices 
likely will remain under pressure this fall. 

Linseed oil supplies for the 1977-78 marketing year total about 325 
million pounds, up roughly a third from last season. With larger 
supplies and lower prices, domestic use of linseed oil may rise from 
last year's 164 million pounds. This assumes some shift by paint an<l 
varnish manufacturers into greater use of linseed oil, as this industry 
represents the largest single outlet for linseed oil. 

Linseed oil exports may expand from last year's 14 million pounds, 
but the level will be influenced by world supplies of flaxseed and 
whether or not the U.S. price is competitive in world markets. West- 
ern Europe represents the major export outlet, but in some years the 
U.S.S.R. and Poland have purchased sizable quantities. 

Linseed oil prices (raw, Minneapolis) this season have declined 
from 28 cents per pound last June to 20 cents in early November. In 
November 1976 prices were around 30 cents per pound". Similarly, lin- 
seed meal prices (34 percent protein, Minneapolis) dropped from 
$170 per ton in June to about $100 in September but have since 
strengthened to $155 in early November, along with other high-protein 
feed prices. 



FLAXSEED PRICES 

$ PER BU.~ ! 




U.S. EDIBLE FATS AND OILS PRICE INDEX 

% OF 1967 1 1 



239 



Linseed meal supplies total 225,000 tons, up about a third from the 
previous year. Practically all of the increase is expected to be used 
domestically, which should boost domestic disappearance to near 0.2 
million tons. 

TALLOW OUTPUT HIGH 

Inedible tallow and grease production in the 1977-78 marketing 
year, which began October 1, is estimated at about 6 billion pounds, 
roughly the same as last season's output. Although commercial cattle 
slaughter may dip a little, hog slaughter should be up sharply. With 
live weight of both cattle and hogs expected to be up or at least no less 
than last year, the net result should leave tallow production about 
unchanged. 

Domestic disappearance is expected to expand slightly from the 3.2 
billion pounds of last season. Disappearance last season was down 
about 4 percent from the previous year as use declined in all major 
outlets — soap, fatty acids, animal feeds, and lubricants. With prices 
averaging lower this season, domestic disappearance should pick up. 
Also, tallow exports may not be as strong this year, leaving more 
available for home use. 

Exports may drop from the 2.8 billion of the previous year. Last 
year's export volume was up one-third, due to large requirements and 
relatively favorable tallow prices in relation to other fats and oils. 
Countries importing large quantities included the Netherlands, 
Egypt. Korea. Japan, the United Kingdom, and West Germany. With 
world production of fats and oils increasing, U.S. tallow exports may 
decline as countries utilize their own large crops or other economically 
competitive imports. Nevertheless, tallow prices are expected to be 
competitive with other fats and oils, which should keep exports at 
high levels. 

Inedible tallow prices (bleachable, fancy, Chicago) during 1976-77 
averaged 17 cents per pound, about 2 cents above the previous year. 
Prices declined from 20 cents last spring to an early November level 
of 17 cents. Prices likely will be more stable this season, given the 
larger world supply of f a"ts and oils. 




U.S. PEANUT SUPPLIES DOWN 



The 1977 peanut crop is estimated at 3.4 billion pounds (farmers' 
stock basis), 10 percent below the 1976 output. Dry weather across 



240 



the peanut belt during the growing season and pest problems are 
primary factors behind the decrease, as acreage for harvest is down 
only slightly. The October 1 indicated yield per acre, at 2,238 pounds, 
is down 227 pounds from 1976. Production is down in all 3 major 
producing regions. With the smaller carryover, the 1977-78 peanut 
supply totals 4 billion pounds, down a fifth. 

Use of peanuts in edible products during 1977-78 is projected to 
increase slightly from last season and may total 1.85 billion pounds. 
On a per capita basis this would be equivalent to about Sy 2 pounds. 
Peanut use per person has increased from around 6 pounds in the 
mid-1950's to the record level of nearly 9 pounds in the past few years. 
Use has increased in all major outlets such as peanut butter, salted 
peanuts, peanut candy, and roasted in-shell peanuts. 

Peanut crushings will drop sharply from 1.1 billion pounds of last 
season. The August-September crush was 62 percent below the same 
2 months in 1976. Smaller peanut supplies and continued good exports 
will keep crushings doAvn. Crushings last year were the second largest 
on record, surpassed only by the 1.4 billion pounds of 1975-76, when 
CCC was toll-crushing peanuts. 

Peanut exports, which hit a record 0.8 billion pounds last season, 
also are expected to be sizable this year. However, they may not match 
the record as increasing world production of oilseed crops will provide 
stiffer competition. Peanut exports tend to fluctuate widely from year 
to year, and are influenced by world peanut output and other oilseed 
production. 

Despite smaller domestic output and expanded use, peanut supplies 
are still in excess of edible and farm use requirements. Thus, the Com- 
modity Credit Corporation will likely acquire about a fifth of the crop 
under the price support program. 

The 1977 peanut crop is being supported at a national average loan 
rate of $430.50 per ton (21.5 cents per pound), an increase of $16.50 
over 1976. This rate, 75 percent of the August 1, 1977, parity price, 
is the minimum price support level for this year's peanut crop. Prices 
received by farmers during the 1977-78 marketing year probably will 
average around 21 cents per pound, about 1 cent above last season, and 
near the loan level. 

PEANUT PROGRAM CHANGES IN 1978 

The Food and Agriculture Act of 1977, signed in September, calls 
for major changes in the CCC price support program for the 1978- 



U.S. PEANUT SUPPLY AND DISAPPEARANCE 

FARMERS' STOCK BASIS 



DiMppc.r.nc* 




U.S. PEANUT ACREAGE AND PRODUCTION 
MIL. ACRES 



241 



U.S. EDIBLE USE OF PEANUTS 

Farmers' Stock Basis 



LBS. PER PERSON 




1961 1964 1967 1970 1973 1976 1979 



YEAR BEGINNING AUGUST 1 




U.S. PEANUT PRICES 



CENTS PER LB. 




crop peanuts. This is the first legislation since the Agricultural Act of 
1949 to modify the peanut price support concept. Large supplies of 
peanuts in recent years and rising Government costs in carrying out 
price supports were major reasons behind the program change. 

The new legislation retains some elements of the old program but 
introduces several new concepts. The target price concept, which is 
continued in the act for wheat, feed grains, rice, and cotton, is not ex- 
tended to peanuts. Instead, the basis of the 1978-81 program is a 
poundage quota program, coupled with acreage allotments and two 
levels of price support. Producers will still need an allotment to grow 
and market peanuts. 

On the following page appears a summary of the major provisions 
of the program expected in 1978 as compared with 1977, assuming pea- 
nut producers approve the continuation of marketing quotas in a ref- 
erendum to be held before December 15, 1977. 

An article entitled "The New Peanut Program" appears in the 
October 1977 issue of the Fats and Oils Situation, FOS-289, which 
presents in detail the basic provisions of the new legislation and de- 
scribes how the program may operate. 

Comparison of the 1977 peanut program with the program expected 

for 1978 



Item 1977 program Expected 1978 program 1 



National acreage allot- 1,614,000 acres 1,614,000 acre minimum, an- 

ment. nouncement before Dec. 1. 

Transfer of allotments.. Secretary of Agri- Legislation required that trans- 
culture allowed fers within a county be allowed, 
transfer within a An allotment transfer also 
county. shifts a proportionate share of 
the quota. 

National poundage None Minimum of 1,680,000 tons. The 

quota. minimum declines 5 percent 

per year thereafter. 

Farm poundage quotas. A producer may A producer's quota will be a 

market as many percentage of his average yield 
peanuts as can be for the best 3 yr during 1973-77 
produced within multiplied by the allotment, 
his allotment. 

1 Assuming producers approve the retention of marketing quotas in a referendum and 
subject to decisions by the Secretary of Agriculture to be announced later. 



242 



Comparison of the 1977 peanut program with the program expected 

for 1978— Continued 



Item 



1977 program 



Expected 1978 program 



Low yield provisions — 



Authority to produce 
"additional" pea- 
nuts. 



Average price support 
level. 



Allowable uses of addi- 
tional peanuts. 



Production under con- 
tract. 



Export of CCC pea- 
nuts. 



Disposition of surplus 
peanuts. 



None, a low yield 
reduced the 
amount of pea- 
nuts marketed. 

Not applicable 



$430.50 per ton (75 
percent of parity) 
minus a $20 per 
ton deduction for 
service charges. 



Not applicable. 



No provisions for 
contract produc- 
tion. 



Minimum price of 
100 percent of 
support level plus 
costs to CCC. 

Sold for domestic 
crush through a 
bid procedure. 



Undermarketings from quota may 
be added to the quota for 
next year. 

Peanuts in excess of a pro- 
ducer's poundage quota but 
grown within his allotment 
may be marketed as "addi- 
tional" peanuts. 

Minimum of $420 per ton on 
quota peanuts. Support on 
additional peanuts to be based 
on expected and crushing 
market conditions with the 
level announced by Feb. 15. 
Price support is no longer tied 
to parity. 

For crush or export. May also be 
used for domestic edible uses 
(food or seed) if marketed 
through the support program 
and purchased at a specified 
minimum price. 

"Additional" peanuts may be 
produced by allotment holders 
under contract for crush or 
export if the contract is sub- 
mitted for approval before 
June 15. 

Secretary of Agriculture will 
announce pricing provisions 
for CCC peanuts at a later 
date. 

Secretary of Agriculture will 
announce pricing provisions 
for CCC peanuts at a later 
date. 



1 Assuming producers approve the retention of marketing quotas in a referendum and subject to decisions 
by the Secretary of Agriculture to be announced later. 



SOYBEAN PRICES 

♦ PER BU. 




1972/73 1973/74 1974/75 1975/76 1978'77 1977 78 
YEAR BEGINNING OCTOBER 1 



U.S. DOMESTIC USE OF FOOD FATS, 
BY END PRODUCTS 



i960 1963 1966 '969 197 

YEAR BEGINNING OCTOBER 



243 



SOYBEAN OIL PRICES. CRUDE, DECATUR 

C PER LB 




1972/73 1973/74 1974/75 1975/76 1976/77 1977/78 
YEAR BEGINNING OCTOBER 1 



SOYBEAN MEAL PRICES. 
44% PROTEIN. DECATUR 

» PER TON 




1972/73 1973/74 1974/75 1975/76 1976/77 1977/78 
YEAR BEGINNING OCTOBER 1 



U.S. DOMESTIC USE OF FOOD FATS, 
BY PRIMARY FATS AND OILS 




I 1963 1966 1969 '972 1975 

YEAR BEGINNING OCTOBER 1 



U.S. CONSUMPTION OF FOOD FATS PER CAPITA, 
BY END PRODUCTS 



POUNDS 




1963 1966 1969 1972 1975 1978 

YEAR BEGINNING OCTOBER 1 



RECENT SPEECHES, BULLETINS, AND ARTICLES AVAILABLE 

Pertaining to Fats and Oils 

A copy of the following releases may be obtained from the ERS Division of Information, Room 
0054 South Building, U.S. Department of Agriculture. Washington, D.C. 20250. 

"World Oil Sources and Trends in Consumption," by George W. Kromer, (202-447-8444). Speech 
before the Fifth Western Hemisphere Nutrition Congress, Quebec, P.Q., Canada, August 15, 1977. 

"The World Peanut Situation and Prospects," by George Kromer, (202-447-8444). Speech at the 
59th Annual Convention of the Southeastern Peanut Association, held at the Hyatt House, Birmingham, 
Alabama, June 88, 1977. 

'U.S. Fats and Oils Statistics. 1961-76," Statistical Bulletin No. 574, June'l 977, compiled by Ralph 
Mullins (202-447-8444). This bulletin incorporates in one book a comprehensive series of statistics on the 
U.S. fats and oils industry and complements the salient statistics appearing regularly in the Fats and Oils 
Situation, issued 4 times a year by the Economic Research Service. 

"Forecasting Retail Margarine Prices," by Paul D. Velde (202-447-8776) and Stanley A. Gazelle 
(202-447-8444). Fats and Oils Situation, FOS-286, February 1977. 

"Demand and Supply of Vegetable Oil Products in the United States: A Short-Run Analysis," by R. 
McFall Lamm, Jr. (202-447-8776). Presented at the Annual Meeting of the Southern Agricultural Eco- 
nomics Association, Atlanta, Georgia, February 6-9, 1977. 



1978 OUTLOOK FOE TOBACCO 



(By Robert H. Miller and Richard Hall, Agricultural Economists, Economic 
Research Service, USDA) 



The tobacco outlook for 1978 is highlighted by a little uncertainty as 
USDA reviews the tobacco program for possible legislative recom- 
mendations. Unless marketing quotas are reduced, output will continue 
to exceed use. Prospects are for U.S. cigarette consumption to rise 
slightly from this year's record high level but our leaf exports are not 
likely to hold near recent levels. Despite the smaller U.S. crop this year, 
it about matches prospective use. The current tobacco quotas for Flue- 
cured and burley allow for more production than is currently used. If 
production is held near the current level and support prices gain as 
indicated, cash receipts may gain slightly. The continued rise in U.S. 
tobacco prices and short supply of better quality leaf means foreign 
buyers are stepping up their efforts to find tobacco with similar quali- 
ties from other countries. 



cigarettes: key to tobacco use 



Cigarettes continue to take four-fifths (1,117 million pounds) of the 
tobacco used in the United States and an even higher share of our un- 
manufactured tobacco and product exports. U.S. cigarette output 
should reach about 676 billion this year, about the average of the two 
previous years. Sales of low tar (less than 15 milligrams of tar) are 
rising to offset declines for cigarettes containing more tar. 

As the smoking age population continues to increase, U.S. cigarette 
smokers may smoke a few more in total even though per capita cigarette 
consumption per person, 18 years and over, may decline slightly in 
1977. In 1976, around 205 packs (4,110 cigarettes) per person were 
used. 




(244) 



245 



Antismoking publicity and legislation continues to increase. For 
example, the American Cancer Society has scheduled a national 
"Smokeless Thursday" for November IT to encourage smokers to quit. 
The cumulative effect on total smoking is uncertain although it could 
be more than marginal. 

Wholesale cigarette prices, wholesale-retail margins, and retail 
prices edged higher in 1977. A 6-percent raise in wholesale prices in 
August, increasing wages for retail labor, and increasing State, county 
and municipal excise taxes meant a hike in cigarette prices above 4 per- 
cent for the year. 

Four States raised excise taxes in 1977. Although the overall average 
increased only slightly, the higher taxes increased the price differen- 
tials among States. Excise taxes vary from 2 cents per pack (North 
Carolina) to 21 cents per pack (Connecticut, Florida, and Massachu- 
setts) and 23 cents per pack (New York City). The wide differentials 
have led to a noticeably higher per capita sales in low-tax States and 
lower than average sales in most high-tax States. 

Consumption of large cigars in 1977 is totaling about 5 billion, 8 per- 
cent below 1976 and 45 percent below the 1964 peak. Also, small cigar 
output may fall one-fifth below the 2.5 billion total of 1976. Smoking 
tobacco output in 1977 is down 4 percent to an estimated 43 million 
pounds, a record low. The steady downtrend suggests younger smokers 
are not as attracted to cigars and pipes as in years past. Next year con- 
sumption may drop further. 

Snuff output is remaining about the same. By contrast, chewing out- 
put probably reached 89 million pounds this year, 6 percent more than 
1976's level. This overall gain may be associated with employment gains 
in mining, construction, and certain durable goods industries where 
smoking is either prohibited or inconvenient. Also chewing tobacco and 
snuff advertisements have appeared on television and radio. 

EXPORT VALUE MAY GAIN, VOLUME MAY NOT 

The value of U.S. exports of tobacco and tobacco products in 1977 
may gain from last calendar year's record high value of nearly $1.5 
billion. The October dock strike impacted on trade as exports were 
very high in the 3 months before the shutdown. Although the value 



WORLD EXPORTS OF FLUE CURED 
TOBACCO 




1974 1975 1976 1977 



EXPORT MARKETS FOR U.S. TOBACCO 

MIL. LB. 




71 73 75 77 79 



. DECLARED WCICHT, YEAR I 



246 



of both unmanufactured tobacco and tobacco products exports is ex- 
pected to exceed last year's record highs, the strike may reduce volume 
to near last season. In recent years, leaf and product exports have 
taken about four-tenths of the U.S. tobacco crop. This year U.S. 
tobacco exports will register about a $1.2 billion surplus over tobacco 
imports for consumption of about $300 million. This favorable tobacco 
trade balance, along with strong sales of other agricultural products, 
is helping offset the country's trade deficit in nonagricultural products. 

Unmanufactured tobacco exports in 1977 may not equal the 580 to 
600 million pounds (645-660 million, farm-sales weight) shipped in 
recent }^ears. Both rising production overseas and U.S. prices will hold 
down 1978 exports. Gains in world cigarette production have slowed 
to around 2-3 percent annually but the preference for light cigarettes 
containing Flue-cured and burley tobaccos continues. In our major 
market, the European Community, takings of U.S. tobacco are ahead 
of 1976. More is going to West Germany and Italy. However, pur- 
chases by Japan and the United Kingdom have been down. 

World tobacco output this year may total below the 11.9 billion 
pounds produced in 1976, chiefly because output in the United States 
is down. Both Flue-cured and burley production abroad continue to 
rise relative to the United States as foreign use of these tobaccos 
increases. 

Imports accounted for about 21 perent of U.S. manufacturers' 
tobacco utilization last marketing year (17 percent of use for cigar- 
ettes and 80 percent for cigars). Oriental cigarette leaf is the principal 
kind imported. Cigarette tobacco imports for factory use this year 
may decline to around 210 million pounds. This quantity include- 25 
million pounds of scrap and about 20 million pounds of Flue-cured 
and burley leaf. 

Cigar tobacco imports are mainly filler tobacco, including scrap. 
For this year imports will probably total 85 million pounds for con- 
sumption, slightly higher than a year earlier. High cigar tobacco im- 
ports will probably continue due to requirements for low cost, neutral 
tobacco for blending, and shortages of certain grades and qualities in 
domestic tobaccos. 

LEAF PRODUCTION MAY REMAIN RESTRICTED 

The most notable developments for U.S. producers in 1977 were 
drought-reduced production, a continuation of the upward price 
trend, and the USDA review of the tobacco program. Despite a slow- 
down in utilization and relatively high loan holdings, prices at Flue- 
cnred auctions jumped to new records. Price support levels are sched- 
uled to rise for 1978. Cash receipts are expected to total less in 1977 
because of the smaller volume more than offsets higher prices. Reduced 
yields jumped specified Flue-cured production costs 11 to 12 cents per 
pound, reducing net income in drought areas. Higher input costs 
pushed costs up about 5 percent for yields similar to 1976. 

Total tobacco production is down 11 percent this season. Adding the 
larger carryover, total supplies for the 1977-78 marketing year are 
about the same as last year. With brisk auction bidding and higher 



247 



FLUE-CURED TOBACCO: SUPPLY, PRICE, USE 




YEAR BEGINNING JULY 1 

* MANUFACTURERS' AND DEALERS 

USOA NEG. ERS 223 7 7 ( 9) 



BURLEY TOBACCO: SUPPLY, PRICE, USE 

BIL LB.- 



PER LB. 




1965 '68 71 74 77 '65 '68 71 
YEAR BEGINNING OCTOBER 1 

A ESTIMATED- 



74 



77 



* MANUFACTURERS' AND DEALERS 

USOA 



NEG. ERS 381-77 (9! 



248 



FLUE-CURED TOBACCO: AVERAGE ESTIMATED 
EXPORT PRICES, BY MAJOR PRODUCERS 

U.S. <PER LB. 

150 h 




1960 64 1966 



U.S. IMPORTS OF CIGARETTE TOBACCO 

MIL. LB. n.»HT.Tv 




support levels, Flue-cured tobacco prices averaged 8 percent above 
1976's record level. When burley markets open next week, prices may 
rise and set a new record, surpassing the 1976 season's record of $1.14 
per pound. The 1977 burley support level exceeds the 1976 market 
price and the 1977 crop is smaller. 

At the beginning of the 1977-78 marketing year tobaccco held under 
Government loan totaled 632 million pounds (farm-sales weight) or 
about 60 percent above a year earlier level. The large volume of loan 
tobaccco from this season's Flue-cured crop has not increased stocks 
substantially because of increased sales of previous crop held in loan 
stocks. But most of the old crop loan stocks are the less desirable, low 
stalk tobacco. It appears that it will be difficult for the Stabilization 
Cooperative to recover the loan value of this tobacco. 

Government price support is mandatory for tobacco produced 
under marketing quotas. The legal formula requires that price support 
levels for eligible tobaccos go up about 7 percent next year over 1977. 
The increase results from a rise in the parity index — which is a meas- 
ure of changes in prices paid by farmers, including wages paid to 
hired labor, interest, and taxes. Although the rate of price increases 
for some production inputs has slackened, high costs of energy and 
rising lease rates for Flue-cured allotments are a cause of concern. 

For Flue-cured tobacco, the smaller crop and increased carryover 
means a 1977-78 supply a little below 1976-77. This season USDA 
lowered the Flue-cured quota 12 percent to bring supplies in line with 
use. Growers are selling about 15 percent less than in 1976. Acreage 
decreased and average yield per acre was cut by poor weather. 

The 1977 Flue-cured auction season has just ended with a record 
average of $1.18 per pound. 8 cents above the previous year. Quality 
was mixed; despite the higher supports, the short supply in some 
export categories pushed prices way above support rates. 

Two trends of major concern about the future of the Flue-cured 
tobacco program emerged during the 1977 marketing season: (1) the 
average price set another record, 8 percent above the 1976 level, and 
(2) supplies of upper stalk leaf usually bought by exporters were 
reduced by poor weather and the smaller acreage. 

Both early and late, in the season, prices averaged below the previous 
year as less desirable lower stalk and lower quality tobacco accounted 



249 



TOBACCO PRICES AND PARITY INDEX 

% OF 1959 



220 



180 



140 



100 



60 




J I I L 



Burle y .«+*&\ 



J I I I L 



Parity index* 




^ Fiue-cured 



J I I I L 



1959 



1965 



1971 



1977 



* PRICES PAID FOR ALL ITEMS INCLUDING INTEREST, TAXES. AND WAGE RATES. 
A SEPTEMBER I INDICATIONS 



NEG ERS 782-77(91 



X, P, & IM GRADES* AS A SHARE OF 
U.S. FLUE-CURED TOBACCO 
PERCENT 




1962 '64 

^LUGS, PRIMINGS, AND NONDESCRIPT. A PRELIMINARY. 



'78 



NEG. ERS 2598-77 ( 10 ) 



250 



for a large percentage of marketings. By contrast, September prices 
reached $1.31 per pound to exceed the 1976 price by 13 cents. At that 
time, most of the marketings were upper stalk or export quality leaf. 
A high percentage of early season and late season tobacco went under 
loan in contrast to very little when the market offerings were leaf, cut- 
ters, and smoking tobacco grades. 

The USDA Tobacco Task Force held seven hearings in September 
and October in the Flue-cured producing States. Growers emphasized 
the need to continue the present price support and marketing quota 
programs. Differing views were expressed on the effects on utilization 
of high and rising costs on production. Other growers emphasized the 
high lease rates they have to pay. Many industry officials were con- 
cerned with the continued escalation in support levels and rising pro- 
portion of loan stocks consisting of lower stalk (lower quality) 
tobacco. 

Some lower stalk tobacco graded as containing sand or dirt sold as 
much as 10 cents below comparable grades containing less sand and 
dirt. Thus, there is concern about how the program may be modified 
to obtain more tobacco now selling at a premium without producing 
and marketing a greater volume of tobacco for which there is little 
demand. 

For 1978, under the acreage-poundage program, USDA is required 
to announce the national Flue-curod marketing quota by December 1, 
1977. The 1977 quota was 1,116 million pounds, or 3 percent below 
the previous seasons' use. Supplies are about 2.8 year's use compared 
with the desired supply of 2.5 years, according to the legislative 
formula. 

The 1977-78 supply of burley tobacco is 2 percent above last season. 
Carryover on October 1 was up slightly. This year's crop is down 6 
percent. Acreage and yield are both off slightly. 

Burley disappearance rose in 1976-77 when exports rebounded. In 
1978 domestic burley disappearance may gain with larger available 
supplies and further growth in exports. Carryover stocks next Octo- 
ber 1 will likely change little. 

Burley poundage legislation requires that the national quota be not 
Ipss than 95 percent of estimated disappearance for that year. With 
disappearance around the 610 million pounds for the past 3 years, 
USDA may keep the 1978 burley marketing quota near this season's 
636 million pounds. The 1978 farm quota will increase by the indicated 
undermarketinirs from this year's quotas. 

Supplies of Southern Maryland are about the same as last season. 
Supplies of Fire-cured. Dark Air-cured, and cigar tobacco are larger 
this season. 



251 



BIL 

700 



TOBACCO OUTLETS 

Trends in Manufactured Products and Exports 

MIL. LB. 



600 
500 



Productio 




4ootfmw 



-CIGARETTES- 



PRODUCTION AND TAXABLE 

d| REMOVALS I 




BIL 

8.0 

6.0 
4.0 
2.0 



CIGARS AND CIGARILLOS 
PRODUCTION 



±±i± 



Large 
Small' 

1 1 1 r ^iiv 

U±IXlXU 



mm 



MIL. LB. 
70 

60 

50 

40 id 



SMOKING PRODUCTION 





SNUFF PRODUCTION 



1963 '73 78 '75 '76 '77 '78 



USDA 



QUARTERLY 
SEASONALLY ADJUSTED 
AT ANNUAL RATES 

LAST QUARTER SHOWN ESTIMA TED. 



1968 '73 '78 '75 '76 '77 '78 
ANNUAL 

AT A 

NEG. ERS 229-77 |9) 



quartley 
Seasonally adjusted 
at annual rates 



98-723—77 17 



XOTES ON WORLD TOBACCO OUTLOOK 

(By B. C. Andrews, Director, Tobacco Division, Foreign Commodity Analysis, 
Foreign Agricultural Service, USDA) 



The world market for tobacco has been growing on a long-time up- 
ward trend. Foreign production, trade and consumption particularly 
for Flue-cured and burley types have been rising at a rather rapid rate. 

The world tobacco crop reached a new record in 1976 and cigarette 
consumption rose to new high levels even though the pace was slower 
than most recent years. 

Supplies of tobacco in most areas or available from traditional 
sources appeared adequate to meet anticipated requirements even 
though there was developing an indicated tight supply situation in 
quality Flue-cured tobacco sufficient to meet the rising demand. Prices 
in world markets were rising rapidly. 

In the past year there appeared some slackening in the growth of 
demand for tobacco with slower rates of increase in cigarette output 
particularly in developed countries. Higher prices for cigarettes due 
to rising costs and increased taxes and intensified antismoking efforts 
have tempered the market expansion in a number of major consuming 
countries. 

Cigarette output may continue to trend upward in the next few 
years at least in line with the population increase but actual tobacco 
requirements for usage in cigarettes is expected to lag behind the 
consumption growth rate as manufacturers continue to improve effi- 
ciencies in utilization of leaf tobacco. 

Global production of tobacco in 1977 for Flue-cured and burley types 
is preliminarily indicated dowm from the high level of the previous 
years. Flue-cured is indicated to be down over 120,000 tons with the 
major reduction in the United States and Rhodesian crops. On the 
other hand, larger crops are indicated for Brazil, India, Korea, Pakis- 
tan, South Africa, and Japan but not sufficient to offset the reduction 
in the U.S. crop. 

World burley production is also indicated down with a reduction in 
the United States partially offset by small increases in Italy, Korea, 
and Brazil. Even though U.S. burley exports have/ reached a new 
record level, the U.S. burley share of the world market continues to 
decline. 

World trade is also being affected by the slackening growth in de- 
mand for tobacco products. Manufacturers in a number of major 
importing countries have drawn on stocks rather than increase pur- 
chases. Although world imports for consumption may not have indi- 
cated net change in total volume, the pattern of imports has signifi- 
cantly changed reflecting a shift to lower cost and milder types of 
cigarette leaf from foreign suppliers. Imports into the United States 

(252) 



253 



also dropped slightly in the past year reversing the upward trend 
of recent years. However, with increasing supplies of foreign grown 
tobaccos, and reduced U.S. supplies at higher prices, U.S. imports 
are expected to return to the long-time upward trend. 

U.S. tobacco exports are expected to be down in fiscal year 1978 com- 
pared to the relatively high level of the past year. Heavier shipments 
in the fourth quarter of the past year, primarily as a result of export* 
ers anticipation of the dock workers strike, boosted the year's export 
movement about 9 percent above the reduced level of a year ago. Be- 
cause of reduced Flue-cured crop in 1977, which was significantly lower 
in quality and with foreign buyers resistance to the higher prices, ex- 
ports in 1978 will be down. The reduced supplies of export grades and 
sharply higher prices caused some foreign buyers to significantly cur- 
tail purchases from the 1977 U.S. Flue-cured crop. Moreover, Govern- 
ment assistance programs for Public Law 480 shipments may be sub- 
stantially reduced in the current year. 

Based on the current analyses, U.S. unmanufactured tobacco ex* 
ports (including bulk smoking tobacco) during fiscal year 1977 totaled 
296,000 tons and were valued at $1.1 billion. This carryover with 273,- 
000 tons valued at $929 million the preceding year. Cigarette exports in 
the past year were 68 billion pieces for a value of nearly $613 million 
representing a growth of 16 percent in quantity and 29 percent in 
value. In the previous year cigarette exports were valued at $474 mil- 
lion with a total of all manufactured products exports at about $500 
million. 

Fiscal 1978 U.S. tobacco exports are forecast at about 250,000 tons 
valued at $984 million, both down substantially from the preceding 
year. Leaf tobacco exports will tend to be depressed for the duration of 
the longshoremen's strike because almost all tobacco moves through 
east coast ports and a significant part of the exports are containerized. 
A portion of the leaf that moved during the last quarter of fiscal 1977 
would normally have moved in the first quarter of fiscal 1978. The dis- 
torted trade patterns caused by the current strike are partially respon- 
sible for the pessimistic 1978 outlook ; however, the primary reason is 
foreign buyer resistance to the higher prices and lower quality of the 
1977 Flue-cured crop. 

The size o2 the U.S. Flue-cured crop currently being sold is 17 per- 
cent below 1976 and is reported to be significantly lower in quality. The 
drop in output resulted from a 12-percent quota reduction combined 
with a severe drought during the grooving season. Supplies of upper 
stalk leaf grades, normally desired by exporters, were proportionally 
even smaller than the total crop. The reduced supplies of the export 
grades and resulting sharply higher prices caused many foreign buyers 
to sharply curtail purchases. 

The Japanese Tobacco Corp., the largest leaf customer in fiscal 1977, 
is expected to reduce shipments in the current fiscal year by an esti- 
mated 5 percent to 44,000 tons. Poor quality and higher prices were 
given as reasons for the reduction. West German buyers cite higher 
prices, a shortage of desirable grades and a slump in domestic ciga- 
rette sales as reasons for a projected 10- to 15-percent decline in pur- 
chases in fiscal 1978. The same reasons were quoted by most major 
-buyers who all project lower shipments in fiscal 1978. 



254 



On October 4, U.S. Agricultural attaches in several leading markets 
for U.S. tobacco were requested to contact major users of U.S. leaf in 
their countries to ascertain anticipated purchases of U.S. tobacco in 
the current and subsequent years. A summary of the replies received 
from major markets was : 

West Germany. — (1976 imports from the United States, 42,800 tons, 
$139.7 million) : Substantial reduction in purchases from 1977 crop 
due to high prices and shortage of desirable upstalk grades as well as 
slump in West German cigarette sales. Continuation of cuts in use of 
U.S. leaf for 1978 and subsequent crops if pattern of high prices, short 
supply of desirable grades, and questionable quality continues. 

United Kinqdom. — (1976 imports from the United States, 35.200 
tons, $123 million) : Purchases from 1977 crop are down because of 
high prices and very short supply of suitable quality leaf. Consider- 
ably larger purchases from 1978 crop if ritrht quantities and qualities 
of leaf available and if prices moderate. Xo reductions in purchases 
from subsequent crops if "prices and sup plies are right" and depend- 
ing on impact of internal policies on U.K. consumption. But return to 
pre-1977 price levels will not lead to substantial increases in usage of 
U.S. leaf once blends are changed. 

Netherlands. — (1976 imports from the United States, 12,400 tons. 
$37.7 million) : Large cut in 1977 purchases due to high prices and 
Ioav quality. High U.S. prices are forcing reduction in stocks and use 
of U.S. leaf. Purchases in 1978 and 1979 will depend on price, quality, 
and availability^ but will not return to U.S. tobacco once blends are 
changed. 

Denmark.— (1976 imports from the United States, 3,300 tons, $11.3 
million) : Foresee drastic reduction in U.S. imports unless price and 
supply situation changes. EC tariff structure also hurting U.S. leaf 
imports. Imports in 1977, 1978, 1979 estimated to average 5,000 tons 
based on purchases already made in 1975, 1976, 1977 ; but if 1977 crop 
price/supply situation continues in subsequent years, purchases for 
import in 1980 will be cut to 3,000 tons. 

Ireland.— (1976 imports from the United States, 3,300 tons, $10.9 
million) : Largest user confirms difficulty purchasing usual require- 
ments of U.S. leaf due to price/quality /supply problems with 1977 
crop. Other main users say poor quality and high price of U.S. crop is 
forcing cut in purchase to absolute minimum. Return to "normal" pur- 
chases will depend on price, availability and quality of U.S crop in 
subsequent years. 

Belgium.^— (1976 imports from the United States, 7,400 tons, $23 
million) : Serious concern over continuing high U.S. prices and de- 
cline in domestic cigarette consumption. Mixed pattern of purchases 
from 1977 U.S. crop — one major user cut purchases more than 50 
percent due to price; others maintained or increased U.S. purchases. 

\ otic plan to increase 1978 purchases above 1977 level and cuts likelv 
if U.S. prices do not moderate. Unwilling project purchases past 1978 
due to price and demand uncertainties. 

Smtizerland.— ilNQ imports from the United States, 11,600 tons, 
535. 1 million) : Present U.S. market is "close to a disaster"— virtually 
impossible to purchase quality of leaf needed at anv price. If present 
prices for (op quality export grades continue into 1978 crop, 20 per- 



cent reduction in purchases foreseen with further reductions "very 
probable" in subsequent years. 

ThaUcffid— (1976 imports from the United States. 6,900 tons, $25.3 
million) : Purchases in 1977 estimated 8.100 tons; 1978—8.600 to 9.000 
tons. Consumption growth rate forecast 8 to 10 percent over next few 
years; growth rate for imports U.S. leaf forecast 5 percent. 

Philippines .— (1976 imports from the United States. 6.000 tons. 
S25.S million) : Estimated imports U.S. leaf 1977—7.150 tons; 1978— r 
13,500 tons; 1979—8,000 tons; 1980—9,200 tons. Flue-cured makes up 
70 percent of U.S. imports, balance largely burley. 

Sweden. — (1976 imports from the United States, 7,500 tons, $22.8 
million) ; Normally buys about 3.000 tons per year. Purchases to date 
for 1977 crop total 1,000 tons ; additional 2.000 tons will be bought if 
quality and price do not prevent. Plans to buy 2,800 to 3,000 tons from. 
1978 crop if price and quality are gone, but could buy more if U.S.' 
leaf is relatively better value than competing leaf. Will continue to use 
high proportion of U.S. leaf for quality reasons, but use, once re- 
duced, could remain at lower level if products are acceptable to 
consumers. 

The future for U.S. tobacco in world markets is uncertain. Continu- 
ation of present trends indicate further erosion of the U.S. share in 
world trade. Mounting pressures against the U.S. tobacco industry 
and tobacco programs make it increasingly difficult to project the 
future. Unless the United States is able to make additional supplies 
of acceptable tobacco in more selective grades and qualities at more 
competitive prices available for foreign purchasers to meet their re- 
quirements, the U.S. share of world trade will continue to erode. Con- 
sistent reductions in quotas at higher prices will not maintain exports. 



U.S. GRAIN SITUATION 
(By James J. Naive, Agricultural Economist, Economic Research Service, USDA) 



TOTAL GRAINS 1 

Beginning stocks of all grains for the 1977-78 marketing years at 62 
million metric tons were two-thirds larger than a year earlier and 
the largest since 1972-73. U.S. growers in 1977 harvested a record 261 
million metric tons, up slightly from last year's record. Each of the 
feed grain crops yielded larger harvests, although the corn crop was 
the only record. On the other hand, the wheat and rice harvests were 
down in 1977. These developments resulted in a record large 1977-78 
grain supply of 323 million. 

U.S. grain export prospects are much improved over earlier expecta- 
tions for as the season progressed the outlook for 1977 world grain 
crops dimmed, particularly in the Soviet Union and the Southern 
Hemisphere. Projected exports for the 1977-78 marketing year total 
83 million metric tons, 5 percent above last year and oniy a little 
below the 1975-76 record. 

With most sectors of the feeding industry going into the new year 
in full tilt, domestic use of grains in 1977-78 may increase around 7 
percent which would still fall far short of the levels of the early 
seventies. 

Feed use uncertainties 

Apparent feed use during 1976-77 turned out well below our ex- 
pectations, raising more than usual speculation over 1977-78 fore- 
casts. 2 Last year at this time our analysis indicated that concentrate 
feeding might be up around 7 percent with feed grains 5 percent 
higher (corn pegged at 3.8 billion bushels), wheat feeding 4 times 
larger, and oilseed meal down 8 percent. 

Instead, the accounts show that concentrate feeding was unchanged 
with feed grains actually off 4 percent (corn was 3.5 billion bushels), 
but wheat feeding was up four times and oilseed meal was off 8 percent. 
Those developments occurred when there was production increases of 
15 percent for pork, 4 percent for broilers, 4 percent for fed beef, and 
3 percent for milk. At the same time, roughage supplies wore the tight- 
est in years, and the winter one of the severest on record. Both of these 
situations would point to increased requirements for grain feeding. 

1 Data for sorghum, oats, barley, wheat, rye. and rice (rough equivalent) are aggregated 
on the basis of respective marketing years. 

3 For a discussion of forecasting motbods sop "Quarterly Food Demand for Corn" Robert 
Buteil and .Minor Womack, ERS-649, February 1977. and "The U.S. Demand for Corn. 
Sorghum, Oats and Barley: An Econometric Analysis," Abner Womack. Department of 
Agriculture and Applied Economics, University of Minn., August 197G. 

(2.>0) 



257 



FOOD AND FEED GRAINS » 
[In million metric tons) 



Estimate, Probable 



Item 


1975-76 


1976-77 


1977-78 


variance 3 


Beginning stocks . 

Production .. 

Imports — 


27.5 

248. 7 

.6 


37.1 
256.8 
.4 


61.9 
261.5 
.4 


+5 to -5. 


Total supply 


276.8 


294.3 


323.8 




Feed use 

Domestic use 

Exports 


(118.2) 

155. 1 

84. 5 


(115. 0) 
152.6 
79.5 


(125. 3) 
163.5 
83.4 


+8 to -8. 
+5 to -5. 


Total use 


239.6 


232.1 


246.9 




Ending stocks „ 


37. 


61.9 


76.9 


+10 to -10, 



i Summary of marketing year data for wheat, rye, rice (rough), and feed grains. 
3 See footnotes on grain tables in this report. 

In retrospect, there appears to be several factors that count for at 
least part of this apparent anomaly : 

— The residual estimate. Feed use is not reported directly but is a 
residual after taking all other supply and disappearance items 
into account. If statistical or estimating errors were accumulating 
rather than offsetting, the residual would differ substantially from 
actual feed use. 

■ — Reduced feeding rates. Slaughter weights were lighter for bar- 
rows and gilts while placement weights for feeder cattle were 
heavier. 

— Monesin. This feed additive which improves the efficacy of feed 
conversion in cattle was apparently widely adopted by cattle feed- 
ers in 1977-78. 

Apparent grain feeding during June-September was up about 15 
percent which might be an indication that it was back on track. We 
are forecasting feed uses higher in 1977-78 — all concentrates up 5 per- 
cent; feed grains, oilseed meal 6 and 11 percent higher, but wheat 
feeding off 15 percent. These forecasts take into account : 

— Substantial increases for pork and broiler production. 

— Modest production increases for fed beef, milk, and eggs. 

— Improved roughage supplies. 

— A possible squeeze on feeding margins later in the season that 

could reduce feeding rates. 
Although total disappearance is expected to be up significantly, 
there still is likely to be some stock building during the season. We 
are estimating U.S. stocks could rise to the highest levels since the 
midsixties. Associated with these prospects are the low^ prices experi- 
enced this summer and fall when levels were the lowest in 4 or 5 years. 
But prices have strengthened significantly and will likely rise further 
as the season progresses. The season is likely to end with prices run- 
ning at their highs contrary to the patterns of last year. Factors that 
will influence the level and pattern of prices include: 
—Foreign purchases. To date, export commitments (shipments plus 
outstanding sales) for the 1977-78 marketing year are well below 
this time in recent years. Rice with sharply larger commitments is 
an exception. 



258 



— Growers' inventory management. Producers are making heavy use 
of the 1977 loan program and will have an option to enter the 3- 
year reserve program. The reserve can definitely be a pricing 
factor. 

— The pace of the 1977 fall harvest. The spread between country 
and nearby future corn prices has been unusually tight and it ap- 
pears that rain-slowed harvest has helped to avoid a basis glut. 

■ — World crop developments. Production prospects for 1977-78 have 
generally slipped as the season progressed. It is too early to peg 
the Southern Hemisphere coarse grain crops harvested next spring 
so they may be a pricing factor later. Of course, prospects for the 
next season's harvest can influence prices later. 

WHEAT 

1977-78 A supply record 

The hardiness of wheat was again evidenced in 1977; in spite of 
droughts and floods, this year's crop of 2,027 million bushels is only 6 
percent below last year's record. Planted acreage totaled 74.4 million 
acres, 7 percent less than 1976 ; harvested acreage was down 6 percent ; 
and yields were about the same. 

For the winter crop, planting took place under dry conditions and 
the winter was bitterly cold with little snow. Although drought pre- 
vailed in the Pacific Xorthwest, widespread spring rains in the plains 
changed the outlook quickly, and production was only 2 percent below 
last year. 

In spring wheat areas, declining prices caused Durum growers in 
the northern plains to reduce acreage by one-third, and the Western 
States shifted out of Durum in favor of other crops. The net result was 
that the 1977 Durum crop was down about 40 percent from last year's 
record. Growers of other spring wheat reduced plantings by 12 per- 
cent. The smaller acreage more than offset slightly higher yields and 
the 1977 spring crop of 416 million bushels was 7 percent below a year 
ago. 

With the largest June 1 carryover since 1963, total wheat supplies 
for the 1977-78 crop year were over 3 billion bushels, an all-time 
record. 

Heavy wheat feed use 

Wheat feeding during June-September was around 150 million 
bushels, the largest for that period since 1972 as low prices during early 
hardest attracted feeders to wheat. But the early season price advan- 
tage of feeding wheat faded quickly during late summer as feed grain 
prices fell sharply and wheat prices began to rise. Thus, wheat feed- 
ing will be slow this fall, although wet harvest conditions in the north- 
ern plains resulted in some low quality wheat which will likely move 
into feeding channels. Still, wheat feeding for the season is expected to 
total over 200 million bushels, the largest since 1971-72. 

Wheat exports slow but prospects improve 

Weather developments have reduced 1977 world wheat crop 
prospects, particularly in the Soviet Union and the Southern Hemi- 
sphere; lowered crop quality in maior producing areas; and increased 
import demand to a record level. Other exporting nations have already 
booked much of their expected 1977-78 foreign sales which means that 



259 



the United States likely will supply any large additional world im- 
port demand. Export commitments as of October 30 totaled 672 mil- 
lion bushels, 7 percent below that time in 1976. 

Though exports are running slower than last season, for the season 
they are expected to be well above the 950 million bushels shipped in 
1976-77. 

Loan activity heavy 

Low wheat prices expanded growers' participation in Government 
loan and reserve programs which on October 1 accounted for over 800 
million bushels or one-third of wheat stocks. About 400 million bush- 
els of 1977 wheat, nearly 20 percent of the crop, was under loan. About 
375 million bushels of the 1976 crop remain under loan and substan- 
tial portions of eligible 1976 wheat have been placed in the 3-year 
reserve program. 

Wheat prices recover from 5-year low 

Abundant carryover stocks and the bountiful 1977 harvest pushed 
wheat prices last summer to their lowest level since February 1973. 
As the harvest glut passed, growers' marketing and inventory strat- 
egies become apparent with their heavy use of the loan program. At 
the same time, prospects for the world wheat crop slipped and world 
trade increased while commercial demand in U.S. markets began to 
increase. All of these factors have contributed to a price rise of 40 to 
50 cents a bushel by early November. It appears that farm prices will 
likely continue to strengthen during much of the remainder of the 
season. 

RICE 

The 1977-78 U.S. rice marketing year kicked off with a smaller 
supply, larger export sales, stronger prices, and the prospect of some 
reduction in carryover stocks. 

Stocks at the start of the 1977-78 season were up 8 percent from the 
year ago record ; however, nearly half were inventories of the Com- 
modity Credit Corporation (CCC). Keducecl plantings and less favor- 
able growing and harvesting conditions cut the prospective 1977 U.S. 
rice crop to 99 million hundredweight — around 15 percent less than 
1976's level. Thus, this year's supply of 138 million hundredweight is 
about a 10th below last year's record. 

Domestic use in 1977-78 is likely to rise modestly in line with the 
upward trends for food and brewers use. Because of smaller crops in 
some major producing countries and continued expansion in world 
rice consumption, exports are expected to run 5 percent above last 
season's high level. Export commitments for 1977-78 are well ahead 
of the pace of recent vears. 

Total U.S. disappearance will likely be larger than this year's har- 
vest, so stocks at year's end would decline for the first time since 1974- 
75. These developments, and the very strong early season _ foreign 
demand, have lifted prices well above year ago levels. Prices will 
likely average 20 to 25 percent above the $6.63 per hundredweight 
estimated for 1976-77. 

New rice legislation that will apply to the 1978-81 crops is part of 
the Food and Agriculture Act of 1977. Manv of the program provi- 
sions are similar in nature to those found in the 1975 Rice Act. 



260 



FEED SITUATION 

Increased supplies and lower prices of feed concentrates in 1977-78 
should encourage continued expansion of livestock and poultry feed- 
ing. Roughage feed supplies were relatively short in some areas last 
summer but late summer and fall rains improved the situation in many 
areas. With much larger soybean and cotton crops, indications point to 
potentially abundant oilseed meal supplies. 

Current estimates for the 1977-78 feed year which began October 1, 
indicate concentrate use at about 156 million metric tons, up 5 percent 
from the 1976-77 level. Compared with last year, feed grains and pro- 
tein feeds are likely to account for a larger part of this total. 

CORN 

Another record crop 

U.S. corn production based on November 1 conditions is forecast 
at a record 6,367 million bushels, up 2 percent from last year's crop. 
The Nation's corn yield, forecast at 91.5 bushels per acre, is about 
4 bushels more than in 1976. Yields for the Midwest ranged from 
88 bushels per acre in Iowa to 109 bushels in Illinois. Compared with 
1976,* production in the western Corn Belt is estimated to be up about 
a fifth and in the eastern portion about unchanged. 

Low prices spurs feeding 

Corn use by U.S. feeders in 1977-78 is expected to increase about 7 
percent, to near 3.8 billion bushels, because of low feed grain prices 
relative to livestock and poultry prices and tight roughage supplies in 
some areas that required early supplemental feeding. 

Export prospects improve 

U.S. corn exports in 1977-78 are now expected to match the 1.7 bil- 
lion bushels during the past two seasons. Persistent rains during har- 
vest over much of Europe and western U.S.S.R, caused above normal 
harvesting losses, as well as lowered quality, and dry weather has 
lowered crop prospects in the Southern Hemisphere. As a result, 
world imports of coarse grains are expected to be record large. 

Bookings of U.S. corn by importers have lagged well behind the 
pace of recent years. As of October 30, commitments for 1977-78 
totaled only 554 million bushels compared to 775 million a year earlier. 

Stocks continue to build; price outlook brighter 

Projected corn disappearance falls short of the indicated crop so 
carryover stocks next October are likely to increase again. Average 
prices received by farmers in 1977-78 likely will range close to the 
national loan rate. Prices at the farm in September and early October 
ran around $1.60 a bushel, about a dollar less than a year earlier. The 
price weakness could be attributed to the prospective record supply 
that caused some backups in the distribution system, the earlier than 
normal harvest, and large old stocks. But, wet weather slowed harvest 
and recent developments in the U.S.S.R. grain crop have contributed 
to price firmness in late October. Thus, the marketing spread this fall 
has been fairly narrow, despite earlier reports of an impending stor- 
age crunch. 



261 



Once the crop is under shelter, farmers' activity in the loan program 
accelerates, and demand increases, prices during the course of the 
marketing year likely will rise more than seasonally. A sizable volume 
of corn going into USDA's grain reserve program also will bolster 
prices later in the marketing year. 

Farmers active in the loan 'program 

With supplies having more than caught up with demand and prices 
close to loan rates, farmers are changing their marketing strategies. 
Those with storage likely will place much of their 1977 crop in the 
Government loan program. As much as 10 to 20 percent of the 1977 
crop could be placed under loan during 1977-78. By the end of Octo- 
ber, about 190 million bushels or 3 percent of the crop was under loan. 

SORGHUM 

The November 1 forecast for sorghum production was 779 million 
bushels, 8 percent above 1977. While acreage is down, the average 
yield, estimated at 55.4 bushels, is 7 bushels more than in 1976. The 
Texas crop is forecast to be down about a fifth from 1976, as sorghum 
acreage was shifted to cotton, soybeans, and corn. However, crops in 
Kansas, Xebraska, and Missouri are up sharply. 

With an October 1 carryover of 91 million bushels, the sorghum 
supply for 1977-78 would total about 870 million bushels, up about 10 
percent from last season. 

Sorghum feeding may increase 10 to 12 percent in 1977-78. Wheat 
feeding is not as attractive as last summer when wheat prices were 
low compared with sorghum. The comparatively low sorghum prices, 
coupled with 5 percent more cattle on feed this fall, is likely to result 
in liberal feeding or sorghum during October-May. 

Sorghum exports for 1977-78 are projected between 200 and 250 
million bushels compared to 250 million bushels shipped in 1976-77. 
Poorer quality world wheat suggests that more wheat will be fed in 
lieu of feed grains during 1977-78. However, relatively low domestic 
sorghum prices, and prospects for reduced availabilities from Argen- 
tina in 1978, will enhance the competitiveness of U.S. sorghum. 

With production indicated above expected usage for the third con- 
secutive season, carryover stock of sorghum next October will likely 
increase substantially. Sorghum prices received by farmers in 1977-78 
are projected to range around the national average loan rate of $3.39 
per hundredweight. Prices declined about SI per hundredweight since 
last spring but have strengthened in recent weeks and likely will rise 
more than seasonally. By the end of October around a tenth of the crop 
had been placed under loan. 

OATS 

Oats fed to livestock in June-September totaled 222 million bushels, 
7 percent above a year earlier and the first increase for the period in 4 
years. Contributing to heavier oat feeding is the sharp drop in oat 
prices since last spring when they were record high. With the much 
larger 1977 crop coupled with slumping prices for other grains, oats at 
the farm last summer were bringing only about 90 to 95 cents a bushel. 



262 

Total use of oats in 1977-78 likely will fall short of production, re- 
sulting in between 250 and 325 million bushels carried over into 1978- 
79, the largest since 1974. 

During recent years, oats prices were 5 to 10 percent above corn — 
pound-for-pound basis — compared with a traditional relationship 
of 10 to 15 percent below the price of corn. During June-October, oat 
prices averaged about the same as corn — pound basis — and likely will 
continue to do so for the remainder of the season. 

BARLEY 

Barley disappearance during June-September was down 16 percent 
from a year earlier when there was considerable wheat fed in lieu of 
barley. But stronger wheat prices could lead to some step-up in barley 
feeding during October-May. In this event, barley feeding for the 
entire season may be down only about a tenth. 

Exports during June-September were the largest since 1973. Barley 
exports projected for 1977-78 total 60 million bushels, down from the 
66 million shipped in 1976-77. 

Prices of feed barley prices also have fallen sharply. Feed barley, 
at -Minneapolis during June-September averaged around $1.60 per 
bushel, down around 90 cents from a year earlier. During the sum- 
mer, barley averaged about the same as corn on a pound-for-pound 
basis, but a year earlier, barley was about 5 percent more than corn. 
Traditionally, barley averages around 90 to 95 percent of corn. 

Barley prices during 1977-78 likely will move up a bit more than 
seasonally, because of good export demand and farmers' use of the 
loan program. 

OUTLOOK FOR 19 78 

1978 Programs may he ma)or influence 

The recently enacted Food and Agriculture Act of 1977 has provi- 
sions for set-aside and deficiency payments which are similar to pre- 
vious programs. 3 But there are major changes in how these programs 
will operate that will affect cropping decisions. USDA has indicated 
a 20-percent wheat set-aside and has evaluated a number of alterna- 
tives for feed grains. A decision on 1978 set-aside programs will be 
announced by November 15. Here are major proposals o,f program 
provisions : 

— Under the indicated wheat set-aside, if wheat is planted, all set- 
aside requirements must be met to be eligible for USDA loans, 
purchase agreements, and payments on eligible ^commodities. In 
other words, if there is a set-aside for feed grains and wheat and 
both are produced, a grower can't be in one program and not the | 
other and receive program benefits. Also, if growers don't par- 
ticipate in the wheat set-aside but plant wheat, they lose program 
benefits for crops which have no set-aside requirements. 

— The 1978 wheat loan rate will remain at $'2.25 per bushel unless 
the average U.S. farm price for 1977-78 exceeds $2.36 per bushel. 



'For n dotnllod (li^rnRsion of tlio nrovlsions sro. "Commodity Proem m Provision* T ndor 
fhfl vvwui and ■Wimltnro Act of 1077." Jnmp* Johnson and Milton R. Enckson. M 
Boon. Rpt. Xo. rw>. Econ. Ros. Sorw, USDA, Oct. 1077. 



263 



In this event, the rate would rise to $2.35. Loan rates for feed 
grains have not been announced. 
— The wheat target price rises to $3 if the 1978 crop equals or exceeds 
1.8 billion bushels, or $3.05 if it is below 1.8 billion bushels. The 
target price for corn will be $2.10 per bushel : sorghum, barley, and 
oats (if designated) have not been announced. 
— Under the indicated wheat set-aside program, acreage to be set 
aside must equal 20 percent of the actual planted acreage to be 
harvested for grain. Fallowed land will likely not be counted as 
set-aside nor counted as planted acreage. 
— Set-aside acreage must have an approved cover crop such as for- 
ages or small grains that are not allowed to mature. 
— The national program acreage is the number of harvested acres 
required to meet estimated domestic and export needs plus any 
desired change in carry out stocks. 
— Target price payments will be made on a percentage of 1978 
plantings for harvest and the farm program yield. The percentage 
or allocation factor will be determined by dividing the national 
program acreage by the number of acres harvested for grain. 
— If 1978 wheat acreage planted for grain harvest is reduced 20 per- 
cent from 1977 and meets all set-aside requirements, the entire 
acreage will be eligible for target price payments. 
—The total o,f "normal crop acreage'' (NCA) must be reduced by 
the amount of the set-aside. Basically, NCA is the land that was 
cropped in 1977, adjusted for abnormal situations. Crops proposed 
for NCA include wheat, barley, oats. rye. corn, sorghum, rice, soy- 
beans, flax, sunflowers, sugarbeets, sugarcane, upland cotton, and 
dry edible beans. 

— Limitation on all payments a person may receive for all crops in 
1978 is $40,000. Payments for disaster, certain resource ^ adjust- 
ments, and public access for recreation do not count against the 
limit. 

Factors affecting plantings 

Unless there is a major crop failure somewhere in the world next 
vear it looks as if prices in 1978-79 will continue to average around 
loan levels. With this price outlook, target price payments may become 
an important income factor in deciding whether to participate m pro- 
grams. Also, eligibility for the loan, reserve, and disaster programs 
will bear on 1978 set-aside decisions. 4 . . 

The indicated 1978 wheat program offers strong economic incentives, 
.o it appears that participation would be heavy and plantings may be 
down substantially from the 74.4 million acres in 1977. Still, with 
loisture conditions through the entire Wheat Belt much improved 
rom a vear a<ro, yield prospects appear brighter, so the reduction m 
reduction will likely be less than the cut m acreage. 



m 



« For some specification of ff^^n^^^^f^S^, 
tSSSMS SZZ «h A Je^ceTfe» h ^perat.o n w ,th .be University 

I Minnesota Agricultural Experiment Station. August 1976. 



264 



WHEAT AND RICE (DOMESTIC MEASURE)! 



1977/78 



1976/77 Probable vari- 

Commodity Unit 1975/76 prelim. Proj. ability* 



Area: 



WHEAT 



Planted Million acre 

Harvested _ do 

Yield per harvested unit Bushel per acre. 

Beginning stocks Million bushel.. 

Production do 

Imports do 



Supply, total do. 



Domestic: 
Food. 
Seed. 



Domestic, total do. 

Exports do. 



Disappearance, total _ do 

Ending stocks do 

Season average farm price Dollar per bushel. 



RICE 

Area:- 

Allotment Million acre 

Planted __ —do 

Harvested do 

Yield per harvested unit Pound per acre. 

Beginning stocks Million hundred- 
weight. 

Production - do 

Imports do 



75.1 


80.2 


74.4 




69.6 


70.8 


66.6 




30.7 


30.3 


30.4 




435 


664 


1,111 




2, 135 
2 


2, 147 
3 


2, 027 
2 


+30 to —30, 


2, 572 


2, 814 


3, 140 




559 


553 


558 


+10 to -10, 


95 


88 


80 


+5 to —5. 


81 


112 


220 


+30 to -30, 


735 


753 


858 


+45 to -45. 


1,173 


950 


1,100 


+100 to -100, 


1,908 


1,703 


1,958 


+135 to -135, 


664 


1,111 


1,182 


+165 to -165, 


3. 55 


2. 85 


2. 15-2. 35 


1.80 


1.80 


1.80 




2. 82 


2.51 


2.21 




2. 80 


2. 50 


2. 20 




4, 567 


4, 679 


4, 500 




7.1 


36.9 


39.7 




128.0 


117.0 


99.1 


+2 to -2, 



Supply, total do. 



Domestic _ — - do. 

Exports — - —do. 



Disappearance, total do 

Ending stocks do 

Difference unaccounted do 

Season average farm price - Dollar per hundred- 
weight 

See footnotes at end of table. 



135. 1 


153.9 


138.8 






40.2 


42.8 


45.3 


+2 to 


-2, 


56.5 


65.6 


68.0 


+5 to 


-5, 


96.7 


108.4 


113.4 


+5 to 


-5. 


36.9 


39.7 


25.5 


+7 to 


-7. 


+1.5 


+5.8 






8.34 


6.63 


8.00-9.00 







265 



FEED GRAINS AND CORN (DOMESTIC MEASURE) 3 



Commodity 



Unit 



1975/78 



1976/77 
prelim, 



1977/78 



Proj. 



Probable vari- 
ability 2 



FEED GRAINS 

Area: 

Planted.. „ Million acres 

Harvested.. _._ do... _ 

Yield per harvested unit Ton per acre 

Beginning stocks Million short ton. 

Production do 

Imports _ do 



Supply, total _ do. 



Feed do. 

Food, seed, and industrial uses do. 



Domestic, total do. 

Exports... _ _ do. 



Use, total _ do. 

Ending stocks do. 



Area: 



CORN 



Planted. Million acre 

Harvested do 

Yield per harvested unit Bushel per acre. 

Beginning stocks Million bushel.. 

Production do _.. 

Imports do 

Supply, total do 

Feed do 

Food, seed, and industrial uses do 



Domestic, total do. 

Exports... do. 



Use, total do 

Ending stocks do 

Season average farm price Dollar per bushel. 



123.4 


129.5 


128.7 




105.1 


106.8 


107.7 




1.93 


1.99 


2.06 




16 8 


i q n 






203'. 3 


212.4 


221.9 


+4 to -4, 


.5 


.3 


.3 


220 6 


231. 7 


255. 1 




127. 7 


123.2 


131.2 


+8 to -8, 


18.8 


19.8 


20.4 


1HO. J 


i A3 n 

ltO. u 


1 01. 


-f-o lO — o. 


55.1 


55.8 


55.5 


+3 to -3. 


201 6 


198 8 


207 1 


1 q q 


19.0 


32". 9 


48! 


+6 to -6. 


78.2 


84.1 


82.4 




67.2 


71.1 


69.6 




86.2 


87.4 


91.5 




359 


398 


879 




5, 797 


6,216 


6, 367 


+140 to - 


2 


2 


1 


6, 158 


6,616 


7, 247 




3, 558 


3,538 


3,775 


+200 to - 


491 


515 


530 


+10to-l( 


4, 049 


4,053 


4, 305 


+200 to - 


1,711 


1,684 


1,700 


+100 to - 



5,760 5,737 6,005 +250 to -250. 

398 879 1,242 +200 to +200. 

2. 54 2. 20 2. 00-2. 20 



See footnotes at end of table. 



266 



SORGHUM, BARLEY, AND OATS (DOMESTIC MEASURE)* 



1977/78 



1976/77 Probable vari- 

Commociity Unit 1975/76 prelim. Proj. ability 2 

SORGHUM 

YielJ per harvested unit Bushel per acre 49.0 48.6 55.4 

Beginning stocks Million bushel 35 52 91 

Protection do 760 742 779 +35 to -35. 

Imports do 

Supply, total do 795 776 870 

Feed do 508 433 475 +50 to -50. 

Food, seed, and industrial do 6 6 6 

Domestic, total do 514 439 481 +50 to -50. 

Exports do 229 246 225 +25 to -25. 

Use, total do 743 685 706 +60 to -60. 

Ending stocks do 52 91 164 +50 to -50. 

Season average farm price Dollar per bushel 2.37 1.95 1.85-2.05 

BARLEY 

Yield per harvested unit Bushel per acre 43.9 44.8 42.2 

Beginning stocks Million bushel 92 129 126 

Production do 384 377 405 +10 to -10. 

Imports do 16 11 10 

Supply, total do 492 517 541 

Feed do 192 161 150 +25 to -25. 

Food, seed, and industrial do 147 157 164 +5 to —5. 

Domestic, total do 339 325 314 +25 to -25. 

Exports J do 24 66 60 +5 to -5. 

Use, total do 363 391 374 +20 to -20. 

Fnding stocks do 129 127 167 +20 to -20. 

Season average farm price Dollar per bushel 2.43 2.29 1.65-1.85 

OATS 

Yield per harvested unit Bushel per acre 48.3 45.4 52.7 

Beginning stocks Million bushel 224 208 168 

Production '. do 658 562 759 +25 to -25. 

Imports do 1 1 1 

Supply, total do 883 771 928 

Feed do 574 504 540 +50 to -50. 

Food, seed, and industrial do 87 89 90 +5 to -5. 

Domestic, total do 661 593 630 +50 to -50. 

Exports do 14 10 10 +2 to -2. 

Use, total do 675 603 640 +40 to -40. 

Ending stocks. do 208 168 288 +35 to -35. 

Season average farm price Dollar per bushel 1.46 1.55 1.05-1.15 



' Marketing year beginning June 1 for wheat, Aug. 1 for rice. 

I The probable variability reflects the SRS estimate of "root mean square error" for production. The chances are about 
2 out of 3 that the final outcome would fall within the indicated range. Comparable estimates of variability are used^for 
other items in the S/U balance. 

» Marketing year beginning Oct. 1 for corn and sorghum; June 1 for barley and oats. 

« Marketing year begins Oct. 1 for sorghum, June 1 for barley and oats. 



267 



TOTAL GRAIN SUPPLY AND DISAPPEARANCE* 




1971 1973 1975 1977 1S79 

* YEAR BEGINNING OCT. 1 FOR CORN AND SORGHUM. JUNE 1 FOR OATS. BARLEY. WHEAT. AND RYE: AND AUG. 1 FOR RICE. 
1 1NCL UDES IMPOR TS. A PR EL IMINA RY. O PROJECTED . 

USDA NEG. ERS 2568 77' 1 1 ) 



WHEAT SUPPLY AND DISAPPEARANCE 




1971 1973 1975 1977 

YEAR BEGINNING JUNE 1 

* INCLUDES IMPORTS. A PRELIMINARY. OpROJECTED. 

, NEG. ERS 2117-77 (111 



98-723—77 18 



268 



ROUGH RICE SUPPLY AND DISAPPEARANCE 




YEAR BEGINNING AUGUST 1 

INCLUDES IMPORTS 1976 PRELIMINARY. 1977 PROJECTED . 

NEG ERS 2119-77 



FEED GRAIN SUPPLY AND DISAPPEARANCE 




1971 1973 1975 1977 1979 



MARKETING YEAR 

* BEGINNING OCTOBER 1 FOR CORN AND GRAIN SORGHUM; JUNE I FOR OATS AND BARLEY. 
^INCLUDES MINOR VOLUME OF IMPORTS. 1976 PRELIMINARY. 1977 PROJECTED. 
USDA NEG. ERS 471-77 (11) 




PRICES RECEIVED BY FARMERS 

% PER BUT" 




JUN DEC JUN DEC JUN DEC JUN DEC JUN DEC JUN DEC 

1972/73 1973/74 1974/75 1975/76 1976/77 1977/78 



USDfl NEG.ERS 2589-77(11) 



OUTLOOK FOR LIVESTOCK AND MEAT 

(By James E. Nix, Agricultural Economist, Economic Research Service. USDA) 



Current prospects point to continued large supplies of red meat and 
poultry in 1978. However, the mix will be different from 1977 as beef 
production declines and pork and poultry production increases. This 
supply situation is expected to result in somewhat higher cattle prices 
and lower hog and poultry prices than this year. 

Total red meat and poultry production in 1977 will about match 
the record high of 1976. Pork and broiler production will be above 
the year-earlier level but the production of beef and other red meats 
and turkeys will be down. 

Large supplies of meat have resulted in fed cattle and hog prices 
remaining relatively stable throughout much of this year. Consumers 
have been able to choose from large supplies of meat. Retail beef prices 
this year have remained relatively stable and near the level of the 
second half of 1976. During the first three quarters of 1977. retail pork 
prices have averaged substantial^ below their year-earlier level but 
slightly above late 1976 prices. 

CATTLE SITUATION 

Financially this has been another bad year for cattlemen. Feeder 
cattle prices have risen a little but so have production expenses for cow- 
calf producers. It is unlikely that the slightly higher feeder cattle 
prices put many cow-calf producers in a profitable operating position, 
particularly when both variable and fixed costs are included. It also 
lias been another rough year for cattle feeders, especially the first 6 
months. Their production expenses, other than feed costs which was 
lower after midvear, also rose while fed cattle prices remained near 
the 1976 level. 

Significant developments during 1977 that affect the cattle industry 
were the, failure of cattle prices to show significant increases, rising 
costs for most inputs, large feed grain and soybean crops, and low for- 
age supplies in some parts of the country. These developments had an 
effect on this year's beef production and their impact on the cattle 
industry will be felt for several years. 

More abundant grain supplies lowered cattle feeders' feed costs per 
100 pounds of gain this summer to the lowest level since 1973. Feed 
costs per 100 pounds of grain during the first half of 1977 were about 
the same as a year earlier. However, second half feeding costs have 
declined substantially, perhaps by $10 or more per hundredweight. 

Even before feed costs dropped this summer, cattle feeders were in- 
creasing the number of cattle placed on feed. Then, during the third 
quarter when feed costs dropped substantially, placements of cattle 

(270) 



271 



on feed increased by 14 percent. This raised the October 1, 1077, in- 
ventory of cattle on feed 5 percent above a year earlier — pointing to 
larger quantities of fed cattle over the next several months. 

In general, forage supplies during 1977 have been less plentiful than 
grain supplies. Severely cold weather during the winter of 1977 froze 
out some of the pasture crops in the Eastern half of the United States 
that normally supply some winter grazing. Also, increased hay feed- 
ing was required and many beef cattle, particularly cows, were sent 
to slaughter. Drought conditions over many parts of the Nation this 
summer caused very poor grazing conditions and the hay crop in these 
areas was below normal. This also forced liquidation of more of the 
cattle herd. Grazing conditions generally improved during late sum- 
mer and early fall, especially in the East. However, forage supplies 
going into this winter remain uncertain in the Southeast and parts 
of the West. 

Fed cattle slaughter during 1977 will probably be about 2 percent 
above the year-earlier level and account for about 62 percent of total 
commerical cattle slaughter. Cattle feeders placed heavier animals 
on feed during late 1976 and through much of this year. This con- 
tributed to a faster rate of turnover of cattle in feedlots. Fed cattle 
marketings remained above year-earlier levels during the first half of 
this year and was down slightly in the summer. This occurred even 
though the inventory of cattle on feed was below last year's level. 

Although still relatively high, nonfed steer and heifer slaughter 
this year probably will be 10 to 12 percent below the 1976 level. A 
large inventory of yearling cattle has helped sustain this high level 
of nonfed slaughter and at the same time support a sizable placement 
of yearlings on feed. Poor grazing conditions in many areas and low 
yearling feeder cattle prices also contributed to this continuing high 
level of nonfed slaughter. Calf slaughter has also remained high. 
With a smaller 1977 calf crop and with calf and nonfed steer and heifer 
slaughter remaining relatively high, the supply of feeder cattle is 
declining. Liquidation of the cow herd has continued throughout this 
year with a commercial cow -laughter of about 9.7 million head. Low 
calf prices and poor grazing conditions in many areas contributed to 
this continuing hi oh level of cow slaughter. 

Total commercial cattle slaughter for 1977 will probably be about 
41.5 million head, down less than 3 percent from 1976. Adding to this 
a commercial calf slaughter of about 5.5 million head and a farm 
slaughter of about 0.7 million head gives a total cattle and calf slaugh- 
ter of about 47.7 million head. This would mean that almost 39 percent 
of the January 1, 1977, total cattle and calf inventory was slaughtered 
this year, the* highest this percentage has been since 1957. Slaughter 
also exceeded this year's estimated 46.1 million head calf crop by 
about 11/2 million head. This would be the second year in a row 
when total slaughter has exceeded the calf crop. Prior to 1976, total 
slaughter had not exceeded the calf crop since 1947. 

The January 1. 1978, inventorv of all cattle and calves is expected to 
be 117-118 million head. This would be a decline of 4 to 5 percent, 
about the same as in 1976. This will be the third year in this liquida- 
tion phase of the cattle cycle and the sharpest downturn in several 
decades. The cow inventory is also expected to be down on January 1, 
1978 and total a little over 50 million head. 



272 



In addition to the shortage of forages in some areas, continuing low 
producer returns during 1977 contributed to a high level of slaughter 
and further liquidation of the cattle herd. Fed cattle prices have re- 
mained relatively stable with quarterly averages for Choice 900 to 
1,100 pound steers at Omaha remaining in the range of $38 to $41 
per hundredweight through the first three quarters of this year. Lower 
grain prices, which stimulated cattle feeding, have helped support a 
little rise in feeder cattle prices. Most of this rise, however, has been 
confined to the lighter weight feeders. 

1978 CATTLE OUTLOOK 

Feed supplies, and particularly forage supplies, will continue to be 
an important variable in the 1978 cattle outlook. This year's large 
grain crops will supply ample quantities of feed grains to support ex- 
panded cattle feeding. However, forage supplies which could have a 
significant impact on further herd liquidation are less certain, partic- 
ularly through the winter months. 

Feed costs during 1978 are expected to be below the average for the 
past few years, but will probably be above 1977 late summer and early 
fall prices. Larger supplies of grain and soybeans likely will mean 
more favorable feeding costs than in recent years and cattle feeding 
is expected to continue to expand. Placements of cattle on feed likely 
will show year-to-year increases this fall and through the first half 
of next year. The inventory of cattle on feed will continue to build 
even though fed cattle marketings are also expected to rise. 

The buildup in the inventory of cattle on feed during late 1977, and 
the continuing increases in placements on feed, point to larger supplies 
of fed cattle in 1978. Fed marketings for the year could be up 3 to 5 
percent with the largest increases coming during the last half of the 
year. During 1978, fed cattle slaughter likely will account for over 65 
percent of the total commercial cattle slaughter. 

Developments in the cattle and grain markets, however, will have 
an impact on cattle feeding next year. If corn prices were to rise 
sharply because of unexpected developments in the world market or 
prospects for a very poor 1978 corn crop, placements of cattle on feed 
and fed cattle marketings next year would likely fall below the level 
suggested here. 

A substantial reduction is expected in the slaughter of steers and 
heifers directly off grass next year. Forage supplies and developments 
in the cattle market, however, will have a big impact on this segment 
of the slaughter. With good grazing conditions and some increase in 
cattle prices, nonfed steer and heifer slaughter next year could be 
reduced by one-third or more. A declining supply of feeder cattle and 
an increased demand for feedlot replacements by cattle feeders are ex- 
pected to support a large reduction in nonfed steer and heifer 
slaughter. Through the winter, year-to-year reductions may not be 
very large but they could become substantial next spring and continue 
so for the remainder of the year. With poor grazing conditions, partic- 
ularly during the spring and summer, next year's nonfed steer and 
heifer slaughter could remain relatively high. 



273 



Year-to-year reductions in cow slaughter could exceed 15 percent 
with good grazing conditions and rising feeder cattle prices. This 
would compare with a 8-9 percent reduction for 1977 and would prob- 
ably be sufficient to halt the downturn in cow numbers. 

Total commercial cattle slaughter for 1978 is expected to be 5 to 8 
percent below this year. With fed cattle accounting for a higher per- 
centage of the slaughter mix next year, average weights should be 
heavier. Thus, next year's total beef production may be off only 2 to 
5 percent. 

The continuing large supplies of beef, plus large supplies of com- 
peting meats, dampens the prospects for a substantial rise in fed cattle 
prices for 1978. Early in the year they expected to run in the high 
$30's to low $40's. They could strengthen a little in the spring and 
continue to trend upward during the remainder of the year. The 
spring price rise, however, is not expected to be substantial. The 
annual average price of Choice slaughter steers at Omaha could be 
$1 to $4 higher than this year's average of about $40. 

Reduced feeder cattle supplies and improved demand by cattle feed- 
ers are expected to result in higher feeder cattle prices. Prices for 
Choice yearling feeder steers could move to the mid- to high-$40's for 
an annual average. Lighter weight feeders will probably sell at a 
premium over yearlings. 

The projected level of slaughter would result in another reduction 
in the cattle inventory during 1978. With the January 1, 1978, cow 
inventory being down again, next year's calf crop will likely be lower 
than the 1977 crop. But in contrast to 1976 and 1977, total cattle and 
calf slaughter likely would not be larger than the expected calf crop. 
Nevertheless, after allowing for death losses and net imports, another 
slight reduction is expected in the cattle inventory on January 1, 1979. 
The cow herd could about stabilize during 1978 at around 50 million 
head. 

TABLE 1.— CATTLE BALANCE SHEET 



Slaughter 

Jan. 1 

inventory Imports Calf crop Cattle Calves Death loss Exports To balance 



1970 112.4 1.2 45.9 35.4 4.2 4.3 0.1 -0.9 

1971 114.6 1.0 46.7 35.9 3.8 4.5 . 1 -. 1 

1972 _. 117.9 1.2 47.7 36.1 3.2 5.1 . 1 -.8 

1973 121.5 1.0 49.1 34.0 2.4 6.5 .3 -.7 

1974 127.7 .6 50.8 37.3 3.2 6.1 .2 -.5 

1975 131.8 .4 50.4 41.5 5.4 7.0 .2 -.5 

1976 128.0 1.0 47.4 43.2 5.5 4.5 .2 

19771 123.0 1.0 46.1 42.0 5.7 5.0 . 1 

19781 117-118 1.0 45.5 39.0 3.6 4.7 .1 

19791 115-117 



* Projected. 

HOG SITUATION 

Financially hog producers probably fared a little better than cat- 
tlemen this year. Hog prices were relatively favorable but rising 
expenses, other than feed, and larger than usual death losses reduced 
net returns. However, feeding costs for hog producers have been de- 



274 



clining during the latter half of 1977. Third quarter feed cost fell to 
the lowest level since early 1973. This helped improve hog producers' 
profit position. 

With the large 1976 corn crop and favorable hog prices through 
much of 1976, hog producers began taking steps to increase pork pro- 
duction. Farrowings during the winter quarter of 1977 were up by 
12 percent. A severely cold winter and disease problems, however, 
caused heavy death losses among pigs and young hogs. Then, follow- 
ing the severe winter and disease problems with sows, spring quarter 
farrowings were down 1 percent from the year earlier. This caused 
a lull in expanding pork production. 

The expansion in pork production has resumed. Farrowings for the 
June-August 1977 period in the 14 States were 10 percent above those 
for the same period last year. Also, on September 1 producers in the 
14 States reported intentions to increase farrowings by 10 and 11 
percent this fall and winter, respectively. 

Pork production during the first half of 1977 was about 12 percent 
above the year-earlier level. But, second half production this year will 
probably be a little below that of last year with a small increase in 
the summer being more than offset by a decline in the fourth quarter. 
This is likely even though the September 1 inventory of market hogs 
in the middle weight groups was about equal to a year earlier as pro- 
ducers continue to hold back gilts for breeding. 

Commercial hog slaughter for 1977 will probably be about 77.5 mil- 
lion head, up 5 percent from last year and about 13 percent above the 
low level of 1975. Total commercial pork production for 1977 likely 
will total a little over 13 billion pounds, up a little over 4 percent 
from 1976. 

Barrow and gilt prices rose seasonally during the first quarter of 
1977, remained relatively stable in the second quarter but then rose 
seasonally during the summer. Prices this fall are declining from the 
summer peak and likely will average a little under $40 per hundred- 
weight. The 1977 annual average price for barrows and gilts at seven 
markets will be near $40, about $3 below the 1976 average. 

19 78 TIOG OUTLOOK 

Feed costs for hog producers during 1978 are expected to be below 
the average for the past few years. However, as corn prices rise from 
their late summer and early fall lows, feeding costs will increase. If 
hog prices decline during 1978 as expected, hog producers will likely 
find their profits squeezed, particularly during the^second half of 
next year. 

If hog producers carry out their farrowing intentions as reported 
in September, pork production during 1978 is expected to rise substan- 
tially, perhaps by 10 percent or more. Pigs farrowed during June- 
August 1977 was up 10 percent and this will supply most of the 
slaughter hogs marketed during the winter quarter of 1978. The June- 
Augusl increase in the 14 States may be somewhat larger than that for 
all States. If this is true, using the 1 KState estimate would tend to 
overstate slaughter for the winter. On the other hand, the September 1, 



275 



1077. inventory of market hogs weighing less than 60 pounds was 
only 5 percent above the previous year. 

If fall farrowing intentions are carried out, spring quarter pork 
production could be up 10 to 12 percent. Although less certain, indi- 
cations are that second half production will also show year-to-year 
increases, perhaps by a larger magnitude than the first half increases. 
The hog-corn ratio was above 20 to 1 this summer and will probably 
continue so through most of this fall. This situation most likely will 
cause producers to go through with their intention? to substantially 
increase farrowings during December-February. Since we are enter- 
ing the breeding season for the spring pig crop with a very favorable 
hog-eorn ratio, we might also expect that pig crop to be up substan- 
tially. These factors suggest large increases in second half 1978 pork 
production. 

Commercial hog slaughter for 1978 could be up 12 to 14 percent. 
This would probably result in a commercial pork production of 14i/> 
to 15 billion pounds. Much larger pork supplies in 197S are expected 
to result in lower market hog prices. By next fall, prices could come 
under strong pressure from much larger supplies and they could drop 
below $30 per hundredweight at some time during the fourth quarter. 
An annual average of $31 to $34 per hundredweight for barrows and 
gilts at seven markets is likely. 

OTHER RED MEATS AXD POULTRY 

Calf slaughter during 1977 has been slightly above last year. Lighter 
dressed weights, however, are likely to result in a slight decrease in 
veal production. This high level of slaughter and production occurred 
despite this year's smaller calf crop. Shortages of feed in various areas 
probably accelerated the movement of calves to slaughter during 1977 
as producers adjusted their cattle and calf numbers to be more in line 
with their forage supplies. An improved demand for feeder calves 
by cattle feeders and a further reduction in the supply of calves is 
expected to result in a substantial reduction in calf slaughter and veal 
production during 1978. 

Lamb and mutton production continues its long term downward 
trend. During 1977. production declined by about 3 percent from the 
year-earlier level. This downward trend is expected to continue 
through 1978 since the inventory of sheep and lambs was further re- 
duced this year. 

Broiler production during 1977 continued its expansion of recent 
years, reflecting favorable broiler-feed price relationships. It will prob- 
ably show an annual increase of about 3 percent this year. Turkey 
production, on the other hand, is expected to show a slight decline. 
In response to low feed costs, both broiler and turkey producers are 
expected to expand output during 1978. This expansion is expected to 
result in an increase of 4 to 6 percent in combined broiler and turkey 
production next year. Larger supplies of poultry products in 1978 
will again compete strongly with red meats for the consumer dollar. 



276 



CONSUMPTION AND RETAIL PRICES 

Per capita consumption of red meats and poultry will total almost 
247 pounds in 1977, nearly matching the 1976 level. Per capita beef 
consumption will be down almost 4 pounds while pork consumption 
is up a little over 2 pounds and broilers about 1 pound. Combined, per 
capita consumption of other red meats (veal and lamb and mutton) 
and other poultry will about equal the 1976 consumption of these 
meats. 

In 1977, this high level of meat consumption has occurred with retail 
red meat prices falling a little below the 1976 level. Retail beef prices 
will average near their 1976 level but retail pork prices will be down 
almost 10 cents per pound. 

In 1978, total per capita consumption of red meats and poultry are 
again expected to be about the same as they were in 1976 and 1977. 
Per capita beef consumption is expected to drop 3 to 7 pounds below 
the 1977 level as retail beef prices rise. Rising consumer incomes are 
expected to support some increase in retail beef prices, even though 
total meat consumption will about match 1977's high level. The year- 
to-year increase is expected to be from 5 to 9 cents per pound. A sub- 
stantial decline in the slaughter of cows and nonfed steers and heifers 
would result in a sharp reduction in the supply of beef that normally 
goes into hamburger. With the apparent demand that has built up 
for hamburger, such a reduction in supply could result in larger price 
increases for hamburger than for beef cuts such as Choice steaks. 

Per capita pork consumption in 1978 could be 6 to 8 pounds above 
this year as retail prices fall, perhaps by 3 to 7 cents per pound. Con- 
tinuing large supplies of beef and increasing supplies of broilers 
will exert a downward pressure on pork prices. 

Per capita broiler consumption is expected to be up 1 to 2 pounds 
while the combined per capita consumption of other red meats and 
other poultry could be about unchanged to down slightly. 

It all sums up to consumers continuing to have a large selection of 
meats from which to choose in 1978. Overall, rises in retail meat prices 
will probably be very small. Large supplies of each type of red meat 
will cause strong price competition among the meats. The possible 
exception to the abundant supply could be hamburger, which could 
show the largest price increase of any of the meats at the retail level. 

A GLIMPSE AT 1979 

The recent high levels of meat production and consumption could 
taper off some in 1979. Beef production will likely continue to decline 
as this liquidation phase of the cycle winds down and herd rebuilding 
gets underway. Pork production could also begin to taper off, partic- 
ularly late in the year. This decline could occur if pork supplies during 
1978 increase enough to push hog prices down to the low $30's during 
the last half of the year. Prices this low would probably cause losses 
that would cause pork producers to begin cutting back, which could 
mean lower pork supplies by late 1979. 



277 




CATTLE SITUATION AND OUTLOOK FOE 1978 



(By Bruce A. Ginn, Project Leader, Western Livestock Marketing Information 

Project, ERS, USDA) 



Higher prices for all classes of cattle and beef are expected in 1978. 
The large inventory reduction since 1975 will impact on prices at both 
the producer and consumer levels. Rising consumer income and popu- 
lation should bolster demand. However, price increases, especially for 
slaughter cattle and beef, could, be tempered by more marketings 
from feedlots, larger production of pork and poultry, and continued 
consumer allocations to nonfood purchases. The dominant factors in 
the 1978 Outlook are: 

(1) Lotver beef production. — Reduced slaughter of cattle directly 
f ronr pastures should more than offset larger marketings from feedlots. 

(2) Relatively depressed grain prices. — Partially in response to 
lower costs of grain, placements of cattle in feedlots have been sub- 
stantial and will lead to higher fed cattle supplies. 

(3) Large production of competing meats. — Abundant pork and 
poultry supplies will make prices of those meats more attractive to con- 
sumers in comparison to beef. 

(4) Higher consumer income. — Historically a positive factor, in- 
creases in consumer income may not bolster cattle prices as in the past. 

(5) Inflationary jyi^essures. — Marketing spreads may not expand as 
rapidly as in recent years, but a limit exists as to the extent the farm- 
to-retail price spread can narrow. 

(6) Changes in market structure. — The affect of verticle integration 
and institutional demand may contribute to a different price effect 
than in past years. 

C A TTLE SLATJGT ITER 

Commercial cattle slaughter for 1978 is forecast at 40 million head, 
down 3 percent from the 41.5 million in 1977. All of the decline will 
be in nongrain-fed cattle slaughtered directly from pasture. This rep- 
resents an important change in the composition of beef supply — more 
fed cattle from feedlots and fewer nonfed types. In 1978, about 66 
percent of total cattle slaughter may be from feedlots compared with 
52 percent in 1975. 

Most of the conditions sufficient for increased placements of cattle 
on feed and marketings from feedlots exist. Grain prices are low rela- 
tive to levels of past years. Slaughter cattle prices have been stable and 
shown limited strength. 

Some cattle feeders have realized profits in recent months. Feeder 
cattle supplies are adequate to accommodate a rise in placements. Feed- 
lot capacity is available to handle more cattle on feed. 

(278) 



279 



CATTLE INVENTORIES AND PASTURE CONDITIONS, 1977 



[Percent of all cattle on each pasture condition] 



Condition 










January 


April 


July 


October 


Severe drought 


9.5 


8.8 


8.4 


2.8 


Very poor . 

Poor to fair 


25.9 

38. 3 


16.6 
51.1 


20.4 
48.3 


14.6 
28.2 



With feed grain prices low, many farmer-feeders in the Midwest 
are considering feeding cattle. In recent months, placements in the 
Northern Plains and Western Corn Belt exceeded year earlier levels by 
more than 20 percent. The shift toward more feeding in the Midwest 
increases the possibility of heavier weights and backlogs. Farmer- 
feeders usually feed cattle longer and when marketing problems arose 
in the past, much of the problem centered on the Midwest. 

Fed cattle marketings for 1978 may be 4—5 percent larger than this 
year. Large supplies for much of the first half of the year are already 
programed. Unless placement rates subside, the same fate awaits the 
latter half of 1978. Almost as important, heavier weights are a real 
possibility. Eternally optimistic cattle .feeders, low feed grain prices, 
and more midwestern-fed cattle greatly enhance the probability of 
heavier weights. 

Lower nonfed slaughter is anticipated. Stronger calf prices have 
enticed some cow-calf producers to retain replacement heifers and 
cull fewer old cows. With the large cow slaughter of past years, many 
old, less productive cows have already been culled. Although some 
areas of drought still exist, fewer cattle are on dry ranges and pastures 
than any time this year. 

In terms of cattle numbers and pasture conditions, the industry is 
in good shape at this time. Regionally, most of the cattle that are on 
pastures in poor-to-fair condition or worse, are in the West and 
Plains. Some States in the Southeast also have experienced problems 
with lack of moisture. Cow slaughter for the first 9 months was 13 
percent above the same period last year in the West and slightly higher 
in the Southeast. Slaughter of cows in all other regions was down and 
is expected to be down 10 percent for the United States. It appears 
dryness in the West and Southeast has been a major factor in keeping 
cow slaughter relatively high. Regionally, the July 1 distribution of 
the beef cow herd was: West 17 percent. Plains 38 percent, Corn Belt 
18 percent, and Southeast 26 percent. 

FEEDER SUPPLY 

Total combined inventories of yearlings and calves outside feedlots 
are down. However, the decline consists completely of calves. Yearling 
inventories are actually about the same as last year. The drop from 
the previous year's level in numbers of calves outside feedlots that has 
prevailed since January 1976, has yet to be reflected in yearling inven- 
tories. In spite of areas of dry pastures, producers nationwide have 
been able to increase yearling inventories outside feedlots. In view of 
declining cow and replacement heifer numbers, the inference is that 
producers have been selling cows, keeping fewer heifers for breeding 
stock replacements, while holding more yearlings on pasture. 



280 



FEEDER CATTLE SUPPLY, OCT. 1 
[In thousands of heads] 





Item 


1975 


1976 


1977 


1976-7> 




9,421 

40,774 


10, 845 
37,513 


10, 762 
36, 401 


-85 
-1,112 








Total .__ 


50, 195 


48, 358 


47, 163 


-1, 19S 



Since the total feeder cattle supply actually consists of many year- 
lings, ample supplies to meet demand for cattle to place on feed will be 
available. Nonf ed slaughter should be less than last year, which leaves 
larger numbers available for placement on feed. With substantial num- 
bers of yearling cattle on hand, higher prices than last fall probably 
have resulted from stronger demand. Over the longer term, past cut- 
backs in calf crops, the cow herd, and replacement heifers will prob- 
ably limit supplies and boost feeder cattle prices. 

REPLACEMENT HEIFERS 

In the past, the change in numbers of replacement heifers on hand 
January 1 has been a good indicator of actual additions to the herd. 
This year, producers intended to add 6 percent fewer heifers on Jan- 
uary 1 and again on July 1 than the same dates a year earlier. However, 
a J anuary-June balance sheet for cows points to more additions than 
the same period last year. Most likely, slightly more heifers will be 
added to the herd than last year. 

As the liquidation phase of this cattle cycle ends and inventories 
start to build, replacement stock will become more valuable. The exact 
timing of price rises may depend on weather (range and pasture con- 
ditions) more than anything else. 

COW INVENTORIES 

Since the peak in cow numbers of July 1, 1975 at 58 million head, the 
national cow herd has been trimmed about 5.7 million or 10 percent. 
Adjustments in cow numbers originate primarily from two sources — 
cow slaughter and cow replacements. Over the past 2 years, cow 
slaughter has remained historically large while cow replacements 
dropped. U.S. cow numbers will likely decrease to the 50.5-51.5 million 
head area next year and then begin to increase by 1970. If so, the stage 
will be set for increases in total cattle numbers which could take place 
by 1980. 

CATTLE HERD 

The Nation's cattle herd probably shrank another 4-6 percent this 
year as disappearance (slaughter and death losses) remained rela- 
tively large. If anticipated levels of slaughter materialize in 1978, a 
more model ate drop is likely next year (assuming no major revisions 
in data). However, changes may already be underway that would re- 
sult in the end to the liquidation phase of this cattle cycle and the 
beginning of an inventory expansion. Although cow-calf operators. 



281 



indicated intentions to retain fewer replacement heifers this year, some 
evidence for the first half of 1977 suggests that more heifers entered 
the cow herd than the same period a year earlier. Increasing the breed- 
ing herd by retaining more heifers and reducing cow slaughter is fun- 
damental to an expansion in total inventories. 

By the outset of 1979, total inventories may be at their low point. 
Assuming some heifer hold-back, cow numbers will show the first 
year-to-year gain by 1979. This point in the cattle cycle is very impor- 
tant in terms of the following implications : 

— Higher prices simultaneously stimulate demand for breeding 
stock ; 

— Normally, calf prices exceed yearling prices which, in turn, are 

greater than slaughter cattle prices ; 
— Supplies of ground and processed beef may be tighter than other 

cuts; and 

— General market direction is upward. 

MEAT PRODUCTION, CONSUMPTION 

Combining the anticipated lower nonfed slaughter with increasing 
fed cattle marketings, 1978 cattle slaughter will likely decline. But 
heavier weights are expected to partially offset the drop in cattle 
slaughter. So, on a percentage basis, beef production may not drop as 
much as cattle slaughter. At present, beef production at 24.6 billion 
pounds, 2 percent less than 25 billion for the } T ear, looks very probable. 

Beef consumption for 1977 was about 125 pounds per person (carcass 
weight) and could decline to 122 pounds next year. However, all of this 
drop in beef supply will be more than offset by larger pork production. 
Red meat consumption in 1978 could be record large at 195 pounds per 
person. In addition, poultry meat will increase, possibly by 5-6 
percent. 

MEAT CONSUMPTION, CARCASS WEIGHT 



[Pounds per person] 



Year 


Beef 


Pork 


Veal 


Lamb 


Red meat 


1976 


129 


58 


4 


2 


193 


1977 


125 


61 


4 


2 


192 


1978 


122 


68 


3 


2 


195 



Large supplies of pork and poultry infer lower prices for those 
meats and intensified competition for beef. It may be that the rela- 
tionships between substitut ability between beef and pork or poultry 
have changed in recent years. Consumers probably are more willing 
to purchase other meats when beef is priced significantly above pork or 
poultry than was the case in the 1950 ? s or 1960's. I,f this is true, then 
we can expect large supplies of pork and poultry to have a greater 
negative effect on beef prices than in the past. 

DEMAND 

Increases in population and consumer income over time have been 
very positive influences on beef prices. Beef is considered to be the 



282 



type of product that, as income rises, expenditures for beef also rise. 
However, since the end of the economic recession in 1975, durable 
goods have held a high priority in the consumer budget. The portion 
of total expenditures spent on food has declined over most of the last 
2 years. Through 1978, consumers may tend to emphasize other por- 
tions of their budget besides food. 

Cattle and beef prices have not exhibited the historical response to 
rising consumer income in this post-recession period perhaps because 
of increasing competition for the consumer's dollar. Spending for 
housing and automobiles has been especially strong. Large supplies 
of other moats provided more direct competition for beef. As a result, 
a change in beef supply did not provide the price response that was 
anticipated. There is little reason to expect the price response from 
lower beef supplies in 1978 will be substantially different from that 
in 1977. 

This does not mean prices of cattle and beef will not rise. Infla- 
tionary pressures on costs will persist. Because of the structure of the 
cattle industry, producers cannot pass their costs on, but much of the 
increased cost between the producer and consumer is passed on. Sub- 
sequently, the price spread between the farm and retail level is very 
much effected by cost pressures. 

Through the years, some of the increase in the farm-to-retail price 
spread has resulted from greater demand for services and convenience. 
This is to be expected as incomes and affluency increase. These services 
are added after cattle leave the farm, therefore, middlemen recoup 
most of the revenue from the added value. As consumers become 
accustomed to these changes and costs are passed on, it is not reason- 
able to expect a substantial decline in the costs of getting beef to the 
consumer. 

Evolution of a fast food, convenience oriented sector in the beef 
industry has increased demand for specific types of beef, especially 
hamburger. Sources of ground and processed beef (nonfed cattle 
slaughter) are expected to wane in upcoming years. Less beef to 
meet the expanded demand infers that hamburger prices must rise, 
probably more rapidly than prices of more expensive cuts of beef. The 
price spread between hamburger and sirloin steaks has already begun 
to narrow and will continue to do so through the remainder of this 
decade. 

CATTLE PRICES 

For most of 1978, cattle feeders may be disappointed in slaughter 
cattle prices and cattle feeding profits. The effects of a moderate drop 
in beef consumption and rising consumer income may be largely 
offset by lower prices for pork and poultry and strong consumer pur- 
chasing of nonfood goods. If so, Choice slaughter steer prices could 
average $41-$43 per hundredweight. Very likely, returns to cattle 
feeding enterprises will be squeezed by higher costs for feeder cattle. 
Many times in the past, cattle feeders responded <o lower feed grain 
costs by bidding replacement cattle prices upward. To some extent, 
this has already occurred and is expected to persist at least through 
early 



283 



Demand for feeder yearlings should be strong, mostly as low feed 
grain costs entice more placements of cattle on feed. Kange condi- 
tions have improved so that lack of forage is not as critical as last 
year, giving people the option of retaining cattle for breeding pur- 
poses. Yet large yearling supplies will be sufficient to meet needs, and 
prices of 600-700 pound Choice steers could average in the mid-$40 ? s 
in 1978. 

Calf prices are the brightest aspect of the cattle outlook. Reflecting 
lower calf crops since 1975, numbers of calves on farms have dropped 
substantially. Higher calf prices generate interest in increasing cattle 
numbers. Strong demand for yearlings also filters down to calf prices. 
Choice 300-400 pound calves are expected to average in the upper 
$40's per hundredweight in 1978, with many sales in the low $50*s. 

AVERAGE PRICES FOR CHOICE STEERS, UNITED STATES 
[Dollars per hundredweight] 



Slaughter 

cattle, Yearlings, Calves, 
Year 900-1,100 lb 600-700 lb 400-500 lb 



1975 45 34 33 

1976 39 39 41 

1977 40 40 44 

1978 Low40's Mid 40's Upper 40's 



BEEF PRODUCTION AND CHOICE SLAUGHTER STEER PRICES (OMAHA) 





Billion 
pounds 


Price per 
hundredweignt 


1977: 

1 


6. 3 


$38 


II 


6. 2 


41 


III 


6. 3 


40 


IV 


6.3 


41 


Year total 


25.0 


40 


1978: 

1 


6.1 


40-42 


II 


5.9 


42-44 


III 


6.4 


41-43 


IV 


6.2 


42-44 


• Year total 


24.6 


41-43 



Source: Western Livestock Marketing Information Project, November 7, 1977. 



AVERAGE PRICES FOR CHOICE STEERS, UNITED STATES 
[Dollars per hundredweight] 





600-700 lb 
yearlings 


400-500 lb 
calves 




• 34 


33 




39 


41 




40 


44 




L Mid 40's 


Upper 40's 









Source: Western Livestock Marketing Information Project, November 7, 1977. 



98-723— 77- 



-19 



OUTLOOK FOE WORLD BEEF PRODUCTION AND 
U.S. BEEF IMPORTS 



(By John E. Riesz, Foreign Agricultural Service, USDA) 



As has been stated, the U.S. herd liquidation continued throughout 
1977. A similar situation has occurred to a great extent in the major 
beef exporting countries of Australia and New Zealand, the European 
Community and in neighboring Canada. These countries also have 
been liquidating their beef herds. In Australia where cattle numbers 
did not decline until 1977 beef production continued to rise in 1976 
and 1977. New Zealand production increased sharply in 1976 but is 
expected to decline by 12 percent this year. Canadian beef output rose 
8 percent in 1976 but will decline 4 percent this year. Beef production 
in the European Community, which peaked in 1975 has continued at a 
high level. Cattle prices in Australia and New Zealand fell to record 
low levels in 1975 and since that time price increases have not been 
enough to offset inflation and increased costs of production. In Aus- 
tralia, export quality grass fattened steers were bringing about $14 
per 100 pounds liveweight and cows around $11 in late September — 
about the same as the year-earlier leA^els. 

As world production rose the pressure to export this beef began to 
build. What was the reaction in the major import markets ? You will 
recall that the Japanese and the nine-member European Community 
virtually stopped importing beef in 1974. Canada placed import quotas 
on beef and live cattle and the United States negotiated agreements 
with 11 major supplving countries to limit their shipments to the 
United States in 1975. 

The situation hasn't changed much today. With intervention stocks 
of beef in excess of 300,000 tons, the European Community continues to 
be highly restrictive in its import policies. Japan has opened its market 
a small way but not to the extent of earlier years. Canada imposed a 
1977 quota of 144.75 million pounds on imports of beef, of which 24.75 
million pounds were allocated to the United States. Thus, the pressure 
continued on the United States, as a major import market in 1976 and 
1977. However, this pressure has been somewhat lessened by large ex- 
ports from Oceania to the Soviet Union and Eastern Europe. 

WHAT IS THE 1978 OUTLOOK ? 

In 197ft. we expect that production declines in the United States and 
Canada will be the major reasons for the second year of declining out- 
put among the traditional beef importers. On the foreign demand side, 
the expected decline in beef and veal production in the EC this year 
has not resulted in an easing of import restrictions because stock levels 

(284) 



285 



of about 300,000 tons still overhang the market. For 1978, some im- 
provement in access to the Japanese market is expected. However, the 
magnitude of these changes will depend upon general economic ac- 
tivity and its effect on consumer demand. 

Large sales to the Soviets and East European countries by Aus- 
tralia and Xew Zealand have reduced stock levels and with an ex- 
pected decline of over a million head in cattle numbers this year, 
1978 production should drop. 

Cattle inventories in Central America and the Caribbean have 
continued to grow this year and as a consequence potential exports 
to the United States in 1978 will be about 10 percent larger than 
expected 1977 shipments. 

Aside from the major import markets (i.e. United States, Canada, 
the EC, and Japan) the Soviet Union has in the past 2 years been 
an opportunistic purchaser of beef and veal on world markets, buy- 
ing at the lowest price. This year the Soviets have purchased bone- 
less beef in contrast to previous bone-in purchases and have paid 
prices which at times were above those quoted for sales to the U.S. 
market. A continuation of sales to the Soviets in 1978 would be a 
major as yet undefined factor in the world's beef supply and demand 
situation. 

The administration is now considering its meat import policy for 
1978. The policy options under consideration will include a con- 
tinuation of the restraint program with supplying countries to limit 
imports into the U.S. market to a specific level. 

1 would like to point out that the meat import law sets a quota 
level and a trigger level for the quantity of meat — mostly frozen 
boneless beef — that may be imported in any one calendar year. For 
example, this year the formula in the law sets the quota at 1,165 
million pounds and allows a 10 percent overage to a trigger point 
for the imposition of quotas at 1,282 million pounds. 

There seems to be some misinformation about what the President 
and the Secretary of Agriculture can do with respect to the law. 
First, the President may not reduce imports below the quota level 
in the law, that is, this year below 1,165 million pounds. Second, if 
the Secretary of Agriculture's estimate of imports in the absence 
of restraints is expected to exceed the trigger quantities set forth in 
the law, the President must invoke quotas. He may then suspend 
them under certain conditions specified in the law. Another policy 
option open to the President is to negotiate a program of voluntary 
restraints to keep imports below the trigger level specified in the law. 
Most Presidents have chosen this option in the past because it is more 
consistent with our international trade obligations under the General 
Agreement on Tariffs and Trade than is the imposition of quotas. 

These Voluntarv restraint agreements are negotiated and enforced 
under the authority of section 204 of the Agricultural Act of 1956. 
The U.S. Government can take action under section 204 to limit im- 
ports to the agreed levels. Such action has already been taken this year 
to limit imports from Costa Rica. Some of you probably do not agree 
with a policy which permits a certain level of beef imports. However, 
I a complete embargo of beef imports is not possible given the current 



286 



meat import law. It would require a change in the law to embargo 
imports. 

In contrast to the highly restrictive practices of other major beef 
importing countries the United States again chose to negotiate volun- 
tary restraint agreements in 1977 at the level of 1,271.9 million pounds. 
These agreements have been operating well this year. For instance, 
through October 29, 83 percent of the year, we have imported 1,023 
million pounds, or 80 percent of the total. Thus, it appears we are 
right on target. The problem of superficially processed beef which was 
such a hot issue last year when we met has been completely covered 
under the voluntary restraint program in 1977. 

As you know, we are the largest exporter of agricultural products 
in the world. We exported about $24 billion of agricultural products in 
fiscal year 1977 while imports exceeded $13 billion for a positive bal- 
ance of trade of almost $11 billion. In fiscal year 1977 we exported $2.2 
billion in livestock and livestock products ; about 10 percent of our total 
agriculture exports. Our major export items were hide and skins, 
tallow and variety meats. Livestock product imports in 1977 amount 
to $1.9 billion. Our major import item was, of course, red meat, pri- 
marily beef. 

For 1978 we are projecting imports at $2.1 billion; up slightly from 
the 1977 levels. Increased unit values of beef will be the major factor. 

In fiscal year 1978, we are looking for a slight decline in livestock 
product exports to about $2 billion. We are expecting a decline in ani- 
mal fat exports, due to the large competing world oilseed crop and we 
also are looking for some decline in pork exports. We expect to increase 
our beef exports to about $130 million; an increase of 15 percent over 
11)77. 



MEAT ANIMAL OUTLOOK 

(By Ewen M. Wilson, Director of Economics and Statistics, American Meat 

Institute) 



I would like to direct my comments into two subheadings. First, 
those relating to supply. Second, those relating to demand. 

Supply. — Xext year we will see a further decline in beef produc- 
tion, and a shift in the beef mix toward more fed, Choice-style beef, 
and less non-fed hamburger type beef. Plentiful hamburger beef in 
the past 3 years was largely a consequence of herd liquidation 
resulting from adverse profits. That is now changing; our feedlots 
are filling up again, more Choice beef is on the way. Pork production 
is also headed for a substantial increase. The hog-corn ratio has been 
running above 20 since June, providing encouragement to hog pro- 
ducers to expand operations. Farrowing intentions and reports of 
gilt withholding indicate that expansion is proceeding at a rapid 
pace. 

I agree with Jim Nix that declining feed grain prices have been 
a significant factor in shaping the outlook for livestock. If anything, 
the past few years have been characterized by distortions of relative 
prices from historical norms. Crop prices, boosted by export demand 
and depleted U.S. reserves, rose both in an absolute sense and also 
in relation to livestock prices. In 1974 the index of prices received 
by farmers for feed grains had risen 150 percent above its 1967 level. 
The price index for meat animals, by comparison, was only 65 per- 
cent over its 1967 level. In other words feed grain prices had risen 
at more than double the pace of livestock prices. That was the pre- 
dominant factor in adverse profits in the cattle sector and a reason why 
in 1975 commercial pork production slumped below the low of 1958. 

Today of course we are looking at alltime record corn and soybean 
harvests and at prospects for substantial additions to carryover in 
the 1977-78 marketing year. That will keep feed prices down and 
encourage cattle feeding and hog expansion. 

One of the consequences of relatively high feed grain prices has 
been a heavy rate of liquidation of the cattle herd. If Jim Xix is 
correct and the January 1, 1978 cattle count comes out at 117.3 million 
then the decline in numbers since January 1, 1975 would be 11 per- 
cent. That's a far more severe adjustment than occurred in the past 
two cattle cycles. The 1965-67 adjustment was less than 1 percent. 
The 1956-58 adjustment was about 5 percent. The last time such 
drastic liquidation occurred was back in the 1945-49 period when 
10 percent of the cattle herd was slaughtered. Even so, that was a 
10 percent adjustment in 4 years; here we are looking at an 11 per- 
cent adjustment in 3 years. 

(287) 



288 



The sheer magnitude of the 1975-78 liquidation provides the most 
encouraging prospects for cattle producers that we've seen for some- 
time. However, I would agree with Jim Nix that a dramatic turn- 
around is unlikely. Increased pork supplies in 1978 will put pressure 
on prices both in the pork and cattle sectors. Jim suggests a 88 million 
head commercial hog slaughter in 1978, a 13 percent increase. That's 
about 68 or 69 pounds per capita. 

Demand. — Sluggish demand has been a pervasive factor in low 
cattle sector profits and has contributed to lackluster retail and farm 
level prices. Probably the one thing that would help the whole livestock 
and meat sector more than anything else at the moment is some evi- 
dence of stronger demand. According to data that we compute at the 
American Meat Institute, gross packer margins in 1977 for both cattle 
and hocrs have been running behind year earlier levels. For instance, 
in the January-October 1977 period the gross margin for hog slaugher- 
ing plants was 17 percent narrower than for the comparable year 
earlier period. At the same time packers are facing higher costs than 
they did a year earlier, particularly for labor and energy. Higher costs 
and lower margins are causing losses among many of them. That's why 
several Mid western packers shut down plants in the past month. 
Unless we see some improvement in demand the malaise of the live- 
stock and meat sector is likely to continue. 

One area that has been difficult to analyze and is proving confusing 
in a projection sense is the relative levels of demand for Choice type 
versus hamburger type beef. As indicated earlier there has been an 
obvious supply phenomenon; the volume of nonfed steer and heifer 
slaughter and cow slaughter which comprises lower quality grade 
hamburger beef increased relative to fed Choice style beef during the 
liquidation phase of the cycle. But increased hamburger supplies were 
not accompanied solely by a movement down the demand curve. Rather 
there appears to have been a shift in the demand curve so that in- 
creased supplies were absorbed by the market at a higher price than 
otherwise would have occurred. Part of this is explained by income 
and population growth, but not all of it. 

In fact if you look at Choice beef, the population and income effects 
appear to have been outweighed by other effects. In 1972 we consumed 
more Choice quality beef than we did in 1975, 1976, and 1977. The 
so-called law of demand says that the lower quantities consumed should 
have been taken from the market at a higher price; a move along the 
demand curve. Tn actual fact, the lower quantity of fed beef in the 
last 3 years has cleared the market at a lower real price. Tn other words, 
it appears that here has been a negative shift in demand for Choice 
beef and a positive shift in demand for hamburger beef. 

The big question today: as we move out of the liquidation phase of 
the cycle, toward more fed. less nonfed beef what is going to happen 
to demand? Tf the new demand mix stays with us. then we will see 
Ffabstanl iaHy higher hamburger prices and rather unresponsive Choice 
feeef prices. However. I believe we are more likely to see a partial shift 
back towards the old demand characteristics. This implies a more 
moderate rise in hamburger prices and some strengthening in Choice 
beef prices. 



289 



Finally, a few comments about pork. Pork is going to be a good 
buy in 1978. Supplies are increasing, prices declining and we are look- 
ing at a much leaner product than in the past ; an important considera- 
tion in todays health conscious market. One area of extreme concern in 
the pork sector is the issue of nitrites and nitrosamine formation. Ad- 
verse publicity has already had a negative demand and price affect. 
The pork bellies market has been particularly responsive to the scare 
reaction triggered by nitrosamine publicity. It happened in the fall of 
1975, it happened again last month. The USD A notice on nitrites 
caused belly holdings to devalue overnight. The industry, quite nat- 
urally does not like these transitory losses. The full effect of an actual 
nitrite ban would, however, be far more serious. A ban would be dis- 
astrous to the pork sector and would have serious consequences in 
allied livestock and grain industries. 

The immediate concern is not so much with the likely effect of a 
nitrite ban. A ban seems unlikely; scientific evidence does not support 
it. The immediate concern steins, rather, from the negative demand 
impact resulting from adverse publicity. I am not sure how significant 
this demand effect is (it is difficult to measure), but it compounds the 
effects of increasing supplies on a downward market trend. 

Thus resolution of the nitrite issue is in the interest of the livestock 
sector. 



OUTLOOK FOE TIMBER PRODUCTS 

(By Robert B. Phelps, Forester, Forest Service, USDA) 



The demand for timber products is largely determined by the levels 
of activity in several important end-use markets. So, before discussing 
demand for the various products, I would like to briefly review trends 
in the economic situation affecting these markets and take a look at 
current estimates of their strength this year and early in 1978. 

DOMESTIC MARKETS 

A major determinant of the demand for many timber products is 
construction activity, and most particularly, residential construction 
activity. As most of you know, housing is the Nation's most important 
market for softwood lumber and plywood, and a major consumer of 
many other timber products such as hardwood plywood, particle- 
board, and insulation board. And not only is it a large direct consumer 
of wood, but it provides the stimulus for homeowner purchase of many 
manufactured goods, including household furniture. Furniture pro- 
duction, of course, is a key manufacturing use of hardwood lumber, 
plywood and veneer, hardboard, and particleboard. 

In 1975, starts of new housing units dropped to 1.17 million units, 
the smallest yearly total since just after World War II. The lowest 
monthly construction rates were early in the year, however, and since 
that time, housing construction has been increasing. Total starts in 
1976 were up nearly a third to 1.55 million units. This year, after 
dropping sharply in January due to the extreme cold weather, the 
increase has continued. Preliminary data indicate the seasonally 
adjusted annual rate of new housing starts during the first three 
quarters of 1977 was just over 1.9 million units. This represented an 
increase of more than 30 percent from the similar period in 1976. 
Almost three-fourths of the units started so far in 1977 have been single 
family. This of course, has special significance for the timber industries 
because wood products use in those units is normally much larger than 
in other types of housing. 

Building permits, an indicator of future starts, are also above year- 
earlier levels. Through the first 9 months of 1977, about 1.3 million 
permits were issued, over a third more than in the same period in 1976. 
These too, have been heavily weighted toward single-family units> 
though somewhat less so than last year. 

Shipments of mobile homes have been recovering slowly from the 
low of 2 years ago. Through the first 8 months of this year shipments 
have equaled an annual rate of 260,000 units— about 5 percent above 
the total for 1976. 



(290) 



291 



Despite the strong upward trends, however, there have been recent 
indications that housing construction activity may flatten out some- 
what late this year and show a small drop in 1978. In late summer in- 
terest rates were moving up and the inflows of funds into the major 
mortgage lending institutions were down sharply from early fall, 
1976. In addition, prices of new houses were continuing to rise, and 
some shortages of materials and labor were being reported. 

Based on trends for the year and on these various factors, most 
housing analysts now expect that housing starts for 1977 will total 
about 1.9 million units, some 23 percent more than in 1976 and almost 
two-thirds above the low of 1975. They also expect that about three- 
fourths will be single-family units. As a consequence, 1977 will likely 
be a record year for one-family construction, surpassing the previous 
high of 1.3 million units constructed in 1972. 

Some additional slowing is expected in 1978 if credit conditions 
continue on their present course. As a result most forecasts indicate 
a. decline in total starts to about 1.7 to 1.8 million units. A slightly 
smaller proportion of single-family starts is also expected. 

Expenditures for residential upkeep and improvements have been 
rising in 1977 as many homeowners apparently met their needs for 
additional space by alterations and remodeling rather than purchase of 
new homes. This long-time upward trend can probably be expected to 
continue. 

In contrast to housing, private nonresidential construction activity 
(measured in 1972 dollars) has shown only limited recovery from 
the declines of 1974 and 1975. At the end of the first 8 months of this 
year private nonresidential building construction is slightly ahead of 
year-earlier rates, led primarily by office and religious buildings. On 
the other hand, construction of private and public educational and 
hospital facilities are still below 1975 and 1976 levels. In late summer, 
surveys of anticipated increases in expenditures for plant and equip- 
ment indicated some rise in last quarter construction. However most 
analysts expect any increases to come only slowly, and for spending to 
remain sluggish in early 1978. 

Industrial production — an important indicator of the demand for 
pallet lumbe", container board, and some grades of paper — has been 
rising and after the first 8 months of 1977 the index was about 6 per- 
cent above the average for 1976. Container production, a large market 
for paperboard, hardwood, veneer, and some grades of lumber, was 
following the same trend. 

Production of furniture and fixtures— an important market for 
hardwood lumber, plywood and veneer, particleboard, and hard- 
board— was about 6 percent above 1976 at the end of the first 7 months 
of 1977. The trend in furniture and fixtures output was presumably, 
in part, due to the rise in housing construction. Many industry analysts 
feel that trends in furniture sales lag new housing sales by about 6 
months. Thus, current housing trends indicate a possible further rise 
in the months ahead with some leveling off in 1978. 

INTERNATIONAL MARKETS 

The United States is the world's leading importer of timber prod- 
ucts—chiefly lumber, woodpulp, and paper and board from Canada 



292 



and veneer and plywood from Southeast Asia. The total value of these 
imports in 1976 was $5.5 billion or about 5 percent of the value of all 
U.S. imports. In terms of round wood equivalent, about a fifth of our 
apparent consumption of timber products have been imported in most 

recent years. . _ _ T 

The 'United States is also a major timber products exporter. In 
1976. the total value of timber product exports was $4.7 billion. Al- 
though we ship a variety of wood products to many countries, our 
principal export markets are Japan for softwood logs and lumber, 
pulp chips, woodpulp. and paper and board products, and Western 
Europe for woodpulp. paper and board products, and smaller amounts 
of lumber and plvwood. 

International demand for U.S. timber products grew rapidly m 
the early 1970's. However, in 1974 and 1975, it declined sharply as 
economic conditions slowed in the principal importing areas. In the 
Western European countries and in Japan, housing construction as 
well as consumer demand dropped. In both areas, timber product in- 
ventories rose to relatively high levels. Although the economic reces- 
sion in most of these countries reached bottom during 1975 and condi- 
tions have been improving since then, the increases have been slow, 
particularly in the European markets. Current estimates are for slow 
to moderate growth in domestic requirements in late 1977 and 1978 
in Europe. Demand in Japan, at least for some wood products has also 
slowed, and housing starts for 1977 are expected to be below 1976 
levels. 

SOFTWOOD LUMBER 

In response to the generally increased activity in its major markets, 
particularly housing, softwood lumber production through the first 
8 months of 1977 has been somewhat above the levels attained in 1976. 
For example, data published by the National Forest Products Asso- 
ciation show that output through August was about 5 percent above 
production in the similar period in 1976. Current expectations about 
housing and other markets in the final quarter of 1977 indicate that 
production will likely slow somewhat in the final quarter and total 
about 32 billion board feet for the year, some 4.3 percent above 1976 
and a record volume for recent years (table 1) . 

Data from the first 8 months of the year indicate that softwood 
lumber imports are likely to rise sharply to about 10.5 billion board 
feet in 1977. nearly a third above 1976 shipments and about 16 per- 
cent above the previous record levels of 1972 and 1973. As has been 
true in recent years, nearly all of this will come from Canada. Ex- 
ports are expected to be about the same as the 1.6 billion board feet 
shipped in 1976. 

Based on the estimates of production, imports, and exports dis- 
cussed above, apparent consumption (i.e., production plus imports 
minus exports), is estimated at 40.9 billion board feet — about 11 per- 
cent above 1976 and also record volume. If housing construction drops 
to 1.7 to 1.8 million starts in 1978, and the other major markets per- 
form as discussed earlier, consumption is likely to decline somewhat. 
Production and imports are also expected to drop. 



293 



TABLE l.-WOOD PRODUCTS PRODUCTION, CONSUMPTION, AND TRADE (1975 AND 1976 ACTUAL, 1977 AND 1978 

PROJECTIONS) 



Product and year 


Domestic 
production 


Imports 


Exports 


Apparent 
consumption 


Softwood lumber (billion board feet): 










1975... . „ 


26. 7 


5.7 


1.4 


31.1 


1976 .__ . _1_ _ _. 


30. 5 


8.0 


1.6 


36.9 


1977 . . 


32. 


10.5 


1. 6 


40.9 


1978... . . __. 


31. 


9. 


1. 7 


38.3 


Hardwood lumber (billion board feet): 










1975... ... .. ._ 


5. 9 


.2 


. 2 


5. 9 


1976 . ; .. 


6. 4 


.3 


.2 


6.5- 


1977 . . . 


6. 6 


.3 


. 2 


6.7 


1978... ... 


6. 8 


. 4 


. 2 


7. 1 


Softwood plywood (billion square feet, %-in basis): 










1975... __ . . . . . 


15. 7 


(0 


. 8 


14.9 


1976... . . . . _. 


17. 8 


0) 


. 7 


17. 1 


1977... . 


18.4 


0) 


■ 4 


18. 1 


1978... .... ........ ... 


18.2 


(0 




17.8 


Hardwood piywcod (billion square feet, ; i-in basis): 








1975. 


1.2 


1.9 


. 1 


3. 1 


1976... . 


1.4 


2.4 


. 1 


3.7 


1977... . 


1. 6 


2. 3 


• 1 


3.8 


1978... ... _ _ . . . 


1. 6 


2. 3 


• 1 


3. 8 


Particleboard ' (billion square feet, %-in basis): 










1975 .... . _ . ... . _ 


2. 6 


to 


■ 1 


2. 5 


1976... ... 


3.2 


CO 


■ 1 


3. 2 


1977 . . .. 


3. 7 


. 1 




3. 7 


1978... _. . ... 


3. 4 


. 1 


;} 


3.4 


Hardbcard (million tons): 










1975 . 


1. 8 


. 1 


• i 


1. 8 


1976 


2. 1 


.2 




2. 4 


1977 


2.2 


.2 


;! 


2.4 


1978... . 1__ ... 


2.2 


.2 




2. 4 


Insulation board (million tons): 










1975 


1.2 


( 3 ) 


( 3 ) 


1.2 


1976 


1.4 


( 3 ) 


( 3 ) 


1.4 


1977 


1.4 


( 3 ) 


( 3 ) 


1.4 


1978 i 


1.4 


( 3 ) 


( 3 ) 


1.4 


Pulpwood (million cords): 






2.5 


67.2 


1975 


69.0 




1976 . 


77.9 


1.0 


3.1 


75.8 


1977 


80.5 


l.i 


2.9 


78.7 


1978 


81.9 


1.2 


3.0 


80.0 



1 Less than 50,000,000. 

2 Includes medium density fiberboard. 

3 Less than 50,000. 

Note: The projections presented for 1977 and 1978 are based on the trends in the major markets discussed in this paper 
and should not be viewed as forecasts of actual volumes. Data presented are subject to rounding. 



Primarily because of the record level of demand, softwood lumber 
prices have" increased sharply in 1977. By September, the wholesale 
price index for all softwood lumber was 328.3 (1967=100) (table 2). 
This was about 18 percent higher than the index in January and 
almost a third above the average for 1976. Much of the rise came in 
late summer. Early in September, however, prices began to drop and 
by October the wholesale price index was 316.4, a decline of 4 percent 
from the September high. Some additional softening is likely if 
demand drops in the months ahead. 

HARDWOOD LUMBER 

The rising activity in the container, pallet, and furniture industries, 
and the somewhat larger use of crossties by the railroads, suggests the 
likelihood of an increase in hardwood lumber demand in 1977. As a 
consequence, production for the year is estimated at 6.6 billion board 
feet — 3 percent more than in 1976. 



294 



TABLE 2.— WHOLESALE PRICE INDEXES FOR SELECTED WOOD PRODUCTS 
[1967 = 100] 



1977 

1975 1976 

Product annual annual September October 



Softwood lumber 200.6 248.1 328.3 316.4 

Hardwood lumber 160.3 176.0 205.9 206.2 

Softwood plywood 200.6 247.4 332.8 314.6 

Hardwood plywood 119.5 122.5 129.8 130.3 

Particleboardi 90.0 97.3 127.0 127.2 

HardboardC 117.7 131.4 143.1 146.1 

Insulation board 144.0 160.8 185.2 187.1 



1 Corestock. 

2 Type II, y r \n. 

Source: U.S. Department of Labor, Bureau of Labor Statistics. 

Unlike the situation for softwoods, hardwood lumber imports during 
the first half of 1977. were close to the levels in the first two quarters 
of 1976. The total for this year is thus estimated at 0.3 billion board 
feet, the same as last year. First half data also showed that exports 
were near year-earlier levels. The total for 1977 is therefore expected to 
be about 0.2 billion board feet, also equal to that shipped in 1976. 

Apparent consumption of hardwood lumber in 1977, based on the 
estimates of production and trade given above, should amount to about 
6.7 billion board feet, 3 percent above 1976. Continued slow growth 
in the hardwood lumber markets pointed out earlier, suggests a further 
increase in demand in 1978, although it is unlikely that consumption 
will rise to the level reached in 1973 and many prior years. 

In contrast to softwoods, hardwood lumber prices, as measured by 
the wholesale price index, have been increasing relatively slow in 1977, 
probably in response to the slow rise in demand outlined above. Prices 
in ( )cf ober were about 10 percent above January, 4 percent less than the 
increase for softwood lumber. If demand continues to improve as dis- 
cussed earlier, prices may well continue to increase slowly late this year 
and in 1978. 

SOFTWOOD PLYWOOD 

According to data published by the American Plywood Association, 
total production of softwood plywood in the first 8 months of 1977 was 
13.2 billion square feet (%-inch basis). This is 5 percent above produc- 
tion in the comparable period in 1976 and undoubtedly reflects the 
st rength in the major markets, particularly housing. Based on the like- 
lihood of continued, though somewhat slower demand in the last quar- 
ter of the year, softwood plywood production for 1977 is estimated 
• ii 18:4 billion square feet, up about 3 percent from 1976 and a record 

level Of OUtput. 

Exports of softwood plywood, which have been slowly rising in re- 
cent years, are sharply down in 1977 and are expected to total only 
about 0.4 billion square feet, some 43 percent below exports in 1976. 
Imports will remain relatively insignificant. 

Apparent consumption in 1977 is therefore estimated at 18.1 billion 
square feet, also a record. In addition to Its increasing use in the hous- 
ing market in 1977. softwood plywood use has been up in maintenance 
and improvements and in several important manufacturing uses. These 



295 



markets are expected to partially offset any declines in housing use 
and as a consequence softwood plywood consumption will likely be 
down by only a small amount in 1978. 

The wholesale price index indicates that softwood plywood prices in 
1077 have followed the same general trends as those for softwood lum- 
ber; that is. rapid increases in response to the high levels of demand 
through September. Softwood plywood prices have also been declining 
in recent weeks and the October wholesale index shows a drop of over 
5 percent since the high reached in September. Some further decline is 
probable if housing construction slows in the weeks ahead. 

HARDWOOD PLYWOOD 

Hardwood plywood production has been rising since 1075, and in 
response to the large numbers of housing units built and the increase 
in tlie strength of manufacturing, production in 1977 is expected to 
total about 1.6 billion square feet (%-inch basis) , some 14 percent above 
1970. 

Data for the first half of 1977 indicate that imports are likely to total 
about 2.3 billion square feet. Exports are expected to remain at the 
1976 level of 0.1 billion. 

Given these trends in production and trade, apparent consumption 
of hardwood plywood in 1977 is estimated at 3.8 billion square feet, up 
3 percent from 1976. Little change in consumption is expected in 1978 
if the various markets continue as discussed earlier. 

Hardwood plywood prices, historically much less volatile than those 
for softwood plywood, have exhibited a small increase in the first 10 
months of this year. Despite this rise, the wholesale price index for 
October was only 5 percent above the average for 1976, and still 2 per- 
cent under the index in October 1974. The relative wholesale price 
index for hand wood plywood (a measure of its price relative to all 
wholesale commodities) was 66.4 (1967 = 100), very probabl} T near the 
all-time low. A continued slow upward movement in prices can be 
expected in 1978 if the major markets continue to improve. 

PARTICfcEBOAKD 

Particleboard production in 1977 is expected to be up about 16 
percent to 3.7 billion square feet (%-inch basis). Data for the first 
half of the year suggest that imports are likely to rise to about 0.1 
billion square feet and that exports will remain unchanged at the same 
volume. Consumption is thus estimated at 3.7 billion square feet, also 
16 percent above 1976. These increases are primarily a reflection of the 
situation in housing — the market for large volumes of particleboard 
used for underlayment under carpeting and for subflooring^ in mobile 
homes — and in furniture manufacture. Expected slowing in the de- 
mand for housing makes a somewhat lower volume of production and 
consumption likely in 1978. 

ITARDBOARD AND IXSULATIOX BOARD 

Hardboard production in 1977 is estimated at about 2.2 million 
tons (about 7.5 billion square feet, i/ 8 -inch basis) , 5 percent above 1976. 



296 



Imports and exports are expected to total 0.2 and 0.1 million tons, 
respectively, the same volumes as in 1976. Consumption with these 
estimates of production and trade would amount to 2.4 million tons 
(approximately 8.3 billion square feet), up about 4 percent. 

Data for the first half of 1977 indicate that insulation board pro- 
duction for the year will total about 1.4 million tons (3.2 billion square 
feet, i/2-inch basis) — the same as in 1976. Imports and exports are 
expected to be under 0.1 million tons. Therefore, consumption is esti- 
mated at 1.4 million tons, also the same as last year. 

If housing and manufacturing output follow the trends outlined 
earlier, the demand for both hardboard and insulation board will 
probably show little change in 1978. 

PULPWOOD 

According to data from the American Paper Institute, production 
of paper and paperboard in the first three quarters of 1977 was at an 
annual rate of about 61.7 million tons, 2 percent above production in 
1976 and very near the historic high reached in 1973. As a consequence, 
production of woodpulp — which currently constitutes about 77 percent 
of the raw materials consumed in U.S. paper and board mills — also 
rose to record levels, as did the pulpwood used for its production. 
Although industry data indicate that paper and board production 
has shown some recent slight decline, woodpulp and pulpwood pro- 
duction are likely to continue at relatively high levels for the re- 
mainder of the year. Based on these factors, pulpwood production 
(roundwood and chips) for 1977 is estimated at 80.5 million cords, 3 
percent above 1976 and only 1 percent below the high reached in 1974. 

Imports of pulpwood are expected to total about 1.1 million cords 
and exports approximately 2.9 million. These volumes are, respec- 
tively, 5 percent above and 7 percent below 1976. The drop in exports 
reflects an estimated 8 percent decline in chip exports. 

Pulpwood consumption in 1977, given the above estimates of pro- 
duction and trade, amounts to 78.7 million cords, some 4 percent more 
than in 1976. Prospective increases in economic activity and some addi- 
tional rise in manufacturing suggest that upward trends in pulpwood 
production, consumption, and trade will continue in 1978. 

SOFTWOOD LOGS 

Softwood log exports through the first three quarters of 1977 
amounted to about 2.3 billion board feet, the bulk of these shipments 
moving from the Pacific Coast States of Washington and Oregon to 
Japan. Current conditions of over-supply in that country, coupled 
with the housing outlook for the remainder of the year, suggests that 
their imports of softwood logs are not likely to rise above year-earlier 
levels in the last quarter. Exports for the year have therefore been 
estimated at 3 billion board feet — about 5 percent below shipments in 
l'.'TC). A slight increase is expected in 1978. Imports of softwood logs 
have been slowly rising since 1973 and are expected to total about 0.1 
billion board feet in both 1977 and 1978. 



297 



HARDWOOD LOGS 

Hardwood log exports in 1977 are estimated at 0.1 billion board 
feet, about the same as in 1976. Although the volume is relatively 
small, many of the logs are walnut, high quality oak. and other pre- 
ferred species that are in short supply in the United States. Thus 
exports have been an important contributing factor to the large in- 
creases in stumpage and log prices for these species. Hardwood log 
imports have been dropping rather steadily since the mid-1950's and 
are expected to total only 10 to 15 million board feet in 1977. There 
will probably be little change in imports or exports in 1978. 

SUMMARY 

Given the trends in consumption, trade, and production for the vari- 
ous products discussed earlier, U.S. production of industrial round- 
wood products (i.e.. the round timber equivalent of all products ex- 
cept fuelwood). is expected to ri^e to about 11.8 billion cubic feet in 
1977. At this level, output would be 3 percent above 1976 and about 
equal to the record volume produced in 1973. Total imports, including 
the pulpwood equivalent of pulp, paper and board is likely to increase 
to about 3.1 billion cubic feet. 14 percent more than in 1976. Exports, 
on the other hand, are expected to remain at about the level of last 
year. With these volumes of production and trade, total apparent con- 
sumption will be 13.5 billion cubic feet, also about the same as in 1973. 
A small decline in consumption, imports, and production can be ex- 
pected in 1978 if the various markets, particularly housing, behave 
as discussed earlier. A rise in exports is likely if the economies of our 
major trading partners continue to improve in the months ahead. 



OUTLOOK FOR DAIRY 



(By Charles N. Shaw, Agricultural Economist, Economic Research 
Service, USDA) 



The dairy situation in 1977 has continued to undergo numerous 
changes. This was a year which saw another large increase in milk 
production, a substantial increase in the support price for manufac- 
turing grade milk which brought farm milk prices slightly above the 
strong 1976 market levels, decreased sales of dairy products, and sharp 
increases in Government purchases and uncommitted inventories of 
dairy products. During the coming year, many of these conditions are 
likely to persist and in some cases worsen. I will discuss these factors 
in more depth after reviewing the major dairy provisions in the 
recently enacted legislation. 

DAIRY PROVISIONS IX THE FOOD AND AGRICULTURE ACT OF 1977 

The 1077 act provides that the price of milk be supported at not less 
than 80 percent of parity through March 31, 1979, after which the 
Secretary of Agriculture can support milk at a level between 75 and 
90 percent of parity, as required by permanent law. 

Second, the support price is to be adjusted by the Secretary on a 
semiannual basis through March 31, 1981, to reflect any estimated 
change in the parity index. Quarterly adjustments in milk price sup- 
ports are permitted but not required. With the new October 1 market- 
ing year, the semiannual adjustment wall occur on April 1 and actually 
will insure the higher support level through September 1979. 

While these two provisions are probably most important in deter- 
in ining the short-run outlook for dairy, other provisions expanded the 
dairy indemnity program, continued the authorizations relating to 
Class T base plans and seasonal incentive plans under milk marketing 
orders and the donation of dairy products to the military and veter- 
an's hospitals, and required the Secretary to issue USDA standards for 
ice cream which he has issued. 

MILE PRODUCTION CONTINUES HEAVY 

Milk production, which moved above year-earlier levels in October 
1975, has continued to increase strongly in 1977 and may exceed 123 
billion pounds for the year. The current expansion may well be the 
longest coni inuous one on record. 

Most of the impetus for the increased production has come from 
favorable milk-feed price relationships and the resulting heavier con- 
centrate feeding and 3-percent increase in output per cow. 



299 



The decline from a } T ear earlier in milk cow numbers lias remained 
very close to a half percent thus far in 1977. This decline has been 
slowed by the relatively favorable conditions for milk production and 
the continued large numbers of heifers entering the milking herd. 

Milk production in July-September was about 2.8 percent above 
a year earlier, following a similar gain during the first half of the 
year. The increases during 1977 have been widespread as all regions 
except the Plains States have posted gains — with substantial gains in 
the important Lake States, Northeast, and Pacific regions. 

Farmers fed almost 6 percent more concentrates on October 1 this 
year than in 1976. Dairy ration costs were well below a year ago in 
October and likely will average lower than a year earlier during the 
barn feeding season. Coupled with expected higher milk prices, milk- 
feed relationships likely will be more favorable for dairy farmers dur- 
ing the first half of 1978 than in early 1977. The milk-feed price ratio 
( pounds of concentrate ration equal in value to 1 pound of milk) stood 
at 1.8-1 in October, well above last year and the highest since Decem- 
ber 1971. Hay costs are lower than last year although supplies are 
tight and prices high in some areas. 

MORE MILK LIKELY IX EARLY 1978 

Milk production likely will remain well above year-earlier levels in 
early 1978, as many of the forces which shaped this year's increase will 
continue. Strong gains in output per cow probably will more than off- 
set moderate declines in cow numbers. 

Milk production later in 1978 will depend on milk prices and cull 
row prices, as well as on crop conditions and subsequent feed prices 
and feeding rates. Continued heavy concentrate feeding is expected 
with strong gains in output per cow. Culling rates could also increase 
and offset the gains in output per cow — resulting in milk production 
stabilizing at a slightly lower level. Production costs other than feed 
likely will continue to increase. All factors considered, milk produc- 
tion in 1978 likely will show an increase of 1-2 percent. 

FARM MILK PRICES TO INCREASE IX 19 78 

Farm milk prices have averaged slightly above year-earlier levels 
during most of 1977, after running below during the first quarter of 
the year. Heavy supplies of milk and dairy products and sluggish 
sales have limited seasonal rises in farm milk prices. Farmers received 
an average $10.10 per 100 pounds of milk in October, up 76 cents from 
May but only 14 cents above a year ago. Manufacturing milk prices 
were about 18 cents below the* $9 support level, when adjusted to 
annual average fat test. Although farm milk prices probably will close 
out the year well above a year ago, milk prices for all of 1977 likely 
will average close to $9.70, up only about a nickel from 1976. Total 
cash receipts from dairying could reach $11.8 billion, up from $11.4 
billion last year. 

Even with the expected heavy supplies, farm milk prices in early 
1978 will average considerably above a year earlier due to the higher 
support price. Prices later in the year will depend largely on milk 
production and commercial sales of dairy products, but the average 
for all of 1978 will be considerably above 1977. 

98-723 — 77 20 



300 



Wholesale butter and cheese prices have remained near the support 
level since adjusting to the increased support prices effective April 1. 
Even with the peak holiday demand period approaching, it is unlikely 
that any substantial price increases will occur in the next few months 
and wholesale prices likely will remain near support at least through 
next year's flush production season. 

Retail prices of milk and dairy products leveled off in early summer 
before increasing slightly in recent months. Prices of milk and dairy 
products in the grocery store probably will rise only slightly in the 
next few months and, for the year, likely will average only 3-4 percent 
above 1976. However, the increase from a year earlier will likely 
widen slightly in early 1978 as both farm milk prices and marketing 
costs are higher and the average for all of next year could be 5-6 per- 
cent above this year. 

DAIRY SALES DOWN 

Sales of milk and dairy products have been sluggish thus far in 
1977, despite the very moderate increase in retail prices. Even though 
strong this summer, total dairy sales during the first 9 months of the 
year were down over iy 2 percent from the corresponding period in 
1976. Unlike previous years when larger cheese sales offset declines 
in sales of other dairy products, commercial disappearance of Ameri- 
can cheese this year has been down just over 1 percent, while sales of 
other cheese were only up about 2% percent. Butter and nonfat dry 
milk are both down over a tenth and ice cream sales are down nearly 
2 percent. Moderate increases in dairy sales may occur next year, par- 
ticularly if cheese sales are helped by continued rises in consumer 
purchasing power and expected increases in beef prices. 

Per capita civilian consumption of dairy products in 1977 will be 
just slightly lower than 1976's 548 pounds milk equivalent. Lower 
sales were largely offset by larger Government donations. Per person 
use in 1978 may increase if sales recover as expected. With the large 
CCC supplies, Government donations probably will be at least as 
large as this year. 

COMMERCIAL DAIRY STOCKS LARGE 

Commercial dairy stocks are still ample although down somewhat 
from earlier this year. On October 1, commercial holdings were down 
about 5 percent from last year's high level. Commercial stocks of 
American cheese were down about 2 percent, while butter stocks were 
down about a fifth from last years relatively high level. Manufactur- 
ers' stocks of nonfat dry milk remained heavy in relationship to the 
reduced level of sales. 

I'SDA rTTRCTIASES HEAVY INVENTORIES LARGE 

rSDA purchases of dairy products under the price support pro- 
gram have been heaw this year. The equivalent of 6 billion pounds 
of milk was removed during the first 10 months of 1977, compared 
with only a auarter billion pounds a year earlier. This vear's removal 
rate was the highest since 19C>7. Among the individual products, re* 
moval of butter, cheese and nonfat dry milk have all been heavy. CCC 



301 



purchases are likely to continue heavy at least through next year's 
flush production season as the increased milk output likely will con- 
tinue to outstrip demand. 

Once the CCC has purchased the products, how are they going to 
encourage larger use through restricted donation outlets? On Novem- 
ber 1 Government uncommitted inventories of American cheese were 
60 million pounds compared with none a year earlier and the highest 
level on that date since 1967. Butter inventories at 163 million pounds 
were the largest since 1963, and nonfat dry milk inventories at 645 
million pounds, were up nearly two-thirds from last year. With the 
expected increase in purchases and restricted donation outlets, un- 
committed inventories will continue to increase. By the end of the 
current marketing year (September 30, 1978) uncommitted inventories 
of butter and American cheese could more than double, while nonfat 
dry milk inventories could be approaching a billion pounds. Obviously, 
wo need to move more surplus products. 

IMPORTS UP SLIGHTLY 

January-September imports this year were slightly above 1976 
levels. About 1.3 billion pounds milk equivalent were imported in the 
first 9 months, up from 1.2 billion last year, as higher cheese imports 
provided most of the increase. Cheese import quotas are being more 
fully utilized this year than in 1976. The relationship of domestic 
prices to world trading prices (some of which are subsidized) con- 
tinued to make the United States a fairly attractive market, despite 
the domestic surplus. 

Commercial exports of dairy products remained small this year. 
However, substantial amounts of nonfat dry milk have been donated 
under the Food for Peace Program — even though well below many 
earlier years. The export donations are expected to continue through 
at least the current marketing year. 

The United States is not the only country with a surplus as output 
has remained heavy in Western Europe. Year-to-year increases of 8 to 
10 percent in EC milk deliveries this summer resulted in a 9-month 
total about '2 percent above a year asro. The situation in other West 
European countries has varied, but milk production has generally been 
strong. New Zealand's milk output was a record in 1976-77, while 
Australia and Canada have successfullv reduced production. 

The diversion of EC milk from butter-powder production to meet 
the strong cheese demand has helped limit intervention stocks. Even 
so, these holdings totaled about 426 thousand metric tons of butter 
and over a million tons of nonfat dry milk on September 1. Despite 
the relative restraint in increasing foreign support prices this year, 
world dairv markets are still very much glutted and no long-term 
solution is in sight. 

SUMMARY 

Next vear likelv will be one of increased production, higher farm 
milk prires, and heavv Government purchases, as surplus conditions 
persist. We can hope for some increase in sales of dairy products but 
wavs must be found to bring supply and demand more closely in 
balance in future years. 



302 

Current Situation Charts 




MILK PRODUCTION, NUMBER OF COWS 
AND MILK PER COW 



1967 




















/ ' 





















I960 1965 1970 1975 " 1330 



MILK-FEED PRICE RATIO* 




JAN. MAR. MAY. JUL SEPT. MOV. 



Figure 3 



WHOLESALE DAIRY PRODUCT PRICES 

t PER LB. 




1S75 1976 



MILK PRICES* 

$ cwt. 







1976 

■-:../ 




1977 






*V ■»«"""""""■'* 
\ _ 

»„> " 


- ..1 - 1. 


1 1 . . L J - V . t_ 1 ! . . * 



EB WAR APR MAY JU\. JUIV AUG SEPI OCT N:. OEC. 



Figure 4 



RETAIL DAIRY PRODUCT PRICES 
CENTS 




Figure 5 



Figure G 





"/ILK SUPPLY. USE AND CARRYOVER 



• 1 1 

^\ > GOVERNMENT STOOS • 

/m \ 












OTAL SLTPIV 


A 

' .. 


L 















13CO 1963 1966 ISOS 1972 1S75 * IS^ 



DAIRY IMPORTS AND EXPORTS 




Figjre 1 1 



Figure 12 



304 



TABLE 1.— DAI 


RY SUMMARY. 1975-77 









Percent change, 

Item Unit 1975 1976 1977 1976-77 



Annual: 1 

Milk production Billion pounds.. 

Milk per cow Pound 

Number of cows Thousands _ 

Milk prices received by farmers.. Dollars per 
hundred- 
weight. 

Manufacturing grade do 

Cash receipts Million dollars.. 

Value of dairy rations Dollars per 

hundred- 
weight. 

Milk-feed price ratio Pound. 

Utility cow prices, Omaha Dollars per 



hundred- 
weight. 



Cents per 
pound. 
do... 



.do 



January to October: 
Wholesale prices: 

Butter (Chicago, Grade A). 



American cheese (Wisconsin 
assembling points, 40-lb. 
blocks). 
Nonfat dry milk (manufac- 
turers' average)- 
Dairy products (BLS) - 1967 = 100 

USDA net removals: 

Butter Million pounds. . 

American cheese do 

Nonfat dry milk do 

Evaporated milk do 

Milk equivalent do 

January to September: 

Retail orices (BLS): 

All foods 1967 = 100 

Dairy products 1967 = 100 

Manufactured products output: 

Butter Million pounds.. 

American cheese do 

Other cheese do 

Nonfat dry milk do 

Canned milk do 

Cottage cheese do 

Icecream Million gallons.. 

Ice milk do 

Imports of dairy products: Total Million pounds., 
milk equivalent. 

Commercial disappearance: 



i oral miiK 

Butter 


minion pounas.. 

do 


American cheese 


do 




do 


Canned milk 


do 


Nonfat dry milk 


do 


Cottage cheese . 


do 


Icecream.. 


Million gallons.. 



Ice milk do. 

Average daily saies in urban markets: 1 

Fluid whole milk 

Fluid low-fat milk 

Cream and cream mixtures 

Total fluid products 



115.3 


120.4 


123.3 


+2.4 


10,352 


10, 893 


11,225 


+3.0 


11, 140 


11,049 


10, 985 


-.6 


8. 75 


9 66 


j. /U 




7.71 


8. 57 


8. 70 


+1.5 


9, 909 


11,426 


11,800 


+3.3 


6.25 


6. 30 


6.00 


-4.8 


1. 40 


1. 53 


1. 62 




21. 09 


25. 31 


25. 50 


-|-. 


75.2 


92.3 


97.9 


+6.1 


83. 8 


97. 


96. 3 


_ 7 


61. 1 


63. 7 


65. 8 


+3. 3 


151. 6 


168. 4 


172. 2 


4-2 3 


63 4 


5 2 


216 9 


(fi 


68.2 


111 3 


147! 7 


( 4 ) 


402 6 


120 1 


421 9 


+251 3 


2L7 


18'. 9 


13*. 4 


-29". 1 




9fi1 
CO I 


R Q7Q 


ai 
\ ) 


174 


180 6 


191 1 


-f-j. 


154 7 


168 4 


173 


4-? 7 


767 8 


/ JU. 9 


837 6 


-1-14 7 
+14. 


1, cot. c 


1 595 3 


1 596 / 


t ■ 1 


856 2 


' 947! 6 


' 969! 4 


+2.3 


838.9 


742.1 


890.3 


+20.0 


716.2 


727.5 


650.3 


-10.6 


664.1 


673.9 


677.8 


+.6 


655.4 


646.1 


634.4 


-1.8 


243.8 


233.4 


240.8 


+3.2 


948 


1,217 


1,282 


+5.3 


85, 350 


87, 582 


86, 178 


-1.6 


717.7 


672.2 


604.5 


-10.1 


1, 284. 


1,436.5 


1,419.9 


-1.2 


965.2 


1, U64. 2 


1, 089. 8 


+2.4 


679.0 


633.9 


561.4 


-11.4 


519.2 


575.0 


501.9 


-12.7 


664. 1 


673.9 


677.8 


+.6 


655.4 


646.1 


634.4 


-1.8 


243.8 


233.4 


240.8 


+3.2 



-3.2 
+6.5 
-3.6 
+.1 



' 1977 estimated. 2 January to September. 8 January to August. < More than 1,000. 



OUTLOOK FOR POULTRY AND EGGS 

(By William E. Cathcart, Agricultural Economist, Economic Research Service, 

USDA) 



Prospects for the egg, broiler, and turkey industries in 1978 point 
to increased production and lower market prices. However, with feed 
prices lower than a year earlier broiler and turkey producers may show 
a small profit during much of the year. On the other hand, egg pro- 
ducers may be in a cost -price squeeze by next spring. 

Before discussing the outlook for poultry and eggs in more detail 
I would like to briefly look at the outlook for feed prices, the general 
economy, and red meats. My remarks concerning these topics have 
been fully covered by others in this conference. 

Production costs, after rising sharply last spring, declined during 
the summer and are currently running below a year earlier. Soybean 
meal prices (49-50 percent protein, Decatur) rose sharply in early 
1977, peaking in April at $299 a ton, up $163 a ton from a year earlier. 
Prices have since dropped sharply and were running around $160 a 
ton in late October. Feed ingredient prices likely will remain below 
year-earlier levels in coming months because of the large grain and 
soybean crops being harvested in 1977. 

This year's corn crop was estimated at a record 6.8 billion bushels 
on October 1. Combined with an 876 million bushel carryover of old 
corn, this would mean a total supply for the October-September 
1977-78 year of about 7.2 billion bushels, 9 percent more than in 1976- 
77 and a little above the previous record supply in 1972-73. Because 
of the large supplies relative to expected usage, prices of corn likely 
will range abound the loan levels. 

Oilseed meal supplies will also be larger in 1978. The 1977 soybean 
crop on October 1 was estimated at 1.6 billion bushels, 30 percent 
above the 1976 crop. Although carryover soybean stocks were down 
from a year ago, total supplies for the 1977-78 marketing season may 
be 16 percent above a year earlier. This would mean substantially 
larger soybean meal supplies for 1978 with prices averaging well below 
1977. 

Consequently, production costs for eggs, broilers, and turkeys likely 
will remain lower than a vear earlier at least through the first half 
of 1978. Feed costs during January-June 1977 accounted for about 
two-thirds of the total cost of producing eggs and more than 70 percent 
of the cost of producing broilers and turkeys. The lower cost of feed 
ingredients should more than offset the rise in the cost of other 
production items. 

Expected growth in the general economy and continued uptrend m 
consumers' incomes will help bolster the demand for poultry meat and 
eggs in 1978. Also, gains in total employment combined with some 

(305) 



306 




easing in unemployment will be a plus factor for the poultry and egg 

industries. 

Poultry producers in 1978 will face stronger competition from larger 
supplies of red meats. The mix will also be different. Beef supplies 
are likely to be below 1977 levels with larger fed beef output being 
more than offset by reduced nonfed beef production. Pork supplies 
are expected to be well above 1977, especially during the second half of 
1978. 

THE OUTLOOK FOR BROILERS 

Broiler meat production in 197S is expected to continue to expand. 
Larger supplies of competing meat and broilers will result in 1978 
wholesale broiler prices averaging moderately below 1977 levels. 

Broiler meat supplies in 1977 are large despite high production 
costs and poor profitability during much of the first half of 1977. 
Supplies for all of 1977 will be up around 3 percent 4vom 1976 and 
15 percent above 1975. Supplies would haA^e been larger had it not 
been for the losses sustained from the extreme cold last winter and 
the abnormally hot weather in late spring and early summer. 

Output of broiler meat in federally inspected slaughter plants this 
year through September exceeded a year ago by about 3 percent Last 
summer's hot weather reduced the number of chicks placed for Oc- 
tober's marketings to near year-earlier levels. However, as the weather 
moderated and feed prices declined, producers stepped up placements 
for late 1977 marketings. Chick placements suggest that there will be 
about a tenth more broilers than a year ago moving to market during 



307 



the last 6 weeks of 1977. This corresponds with the weakest demand 
period of the year for broilers and likely will result in broiler prices 
dropping below the cost of production and marketing. 

The large grain and soybean crops being harvested this fall, cou- 
pled with a relatively favorable profit situation in the summer and 
early fall, are expected to result in broiler producers holding produc- 
tion above a year earlier during the first half of 1978 — perhaps by 5 
to 7 percent. If feed price prospects continue favorable, producers 
will likely continue to hold production above a year earlier during 
the second half of 1978. However, the percentage increase may mod- 
erate from first half levels as producers adjust to sharply larger pork 
supplies. 

Despite large supplies of red meats and broilers this year, broiler 
prices exceeded year-earlier levels during much of the year. Whole- 
sale prices in 9 cities through September averaged 41.9 cents a pound, 
slightly above a year earlier. "Wholesale prices during October re- 
mained fairly strong, but prices will decline more than usual in No- 
vember and December because of the sharp increase in marketing. 
Prices in late November and December may drop to the mid-30's of a 
year earlier despite higher than year-earlier competing meat prices. 

Broiler prices in 1978 will be bolstered by increased consumer in- 
comes and lower beef supplies. However, larger broiler and pork 
supplies will be more than offsetting, and broiler prices are expected 
to average moderately below 1977. 

If broiler output during January-June 1978 increases 5 to 7 percent 
from 1977 levels as now seems likely, broiler prices could average in 
the upper 30 ? s, compared with 41.6 cents a pound during Januaiy- 



C PER LB. 



TURKEY SLAUGHTER* 



B. 






« 
% 
1 








\ 
\ 

J\ 

1976 


r 

1977 

I I 




I I 





JULY OCT. 



TURKEY PRICES* 



<0 L-J I I I t 




BROILER SLAUGHTER* 



MIL. LB. 

L 
r 

800 | 


ML 


• 


1977 <rv 

- 

W /' 


IA \ 

1976 


r * 


{ 


700 \ /* 

\\// 
v»/ 

r w 

600 L 1 1 


_L_ 1 


— i — ( — 





BROILER PRICES* 



C PER LB.' 




JAN. APR. JULY OCT. 



308 



June 197S. However, the decline in broiler prices from a year earlier 
could be more than olfset by lower production costs if feed ingredient 
prices turn out about as expected. 

The demand for broilers has been strong in 1977. Per capita con- 
sumption of young chicken (primarily broilers) in 1977 likely will 
gain around a pound over the 40.4 pounds in 1976. If broiler output 
increases as expected in 1978. consumption of young chicken will likely 
increase 1 to 2 pounds from 1977 levels. 

Exports of young chicken in 1977 may also exceed the record 287 
million pounds of 1976. Through September this year, exports of 
whole young chickens and cut-up chicken parts totaled 235 million 
pounds, 20 percent above a year earlier. Exports were relatively large 
during the last half of 1976 because of the substantial shipments to 
Iraq. Exports to Iraq during the rest of 1977 likely will be down 
sharply. Even so, exports, for all of 1977 likely will be a new record. 

THE OUTLOOK FOR TURKEYS 

Turkey production is expected to show a moderate increase in 1978, 
spurred by lower production costs and good profits in the fall of 1977. 
Larger production of competing meats and turkey will likely result 
in a moderate decline in turkey prices in 1978. 

The 1977 turkey crop was estimated by USDA's Crop Reporting 
Board at 138 million birds, down 1 percent from last year's record 
140 million. This is in line with the reported 1 percent fewer poults 
hatched from September 1976 through August 1977. Heavy breeds 
were estimated to total 126 million. 2 percent above 1976, but light 
breeds dropped 26 percent to 12 million. The change in the mix toward 
more heavy breed and fewer light breed turkeys reflects the demand 
for heavier turkeys for further processing. 

Turkey meat output in federally inspected plants through Septem- 
ber totaled around 1,250 million pounds (ready-to-cook), down nearly 
3 percent from the same period of 1976. There were 5 percent fewer 
turkeys marketed, but the average liveweight was up nearly 2 percent. 

Turkey output may about match year-ago levels this fall. Poult 
production, for marketing during September-December, was down 
about 1 percent. However, a larger percentage of these poults are heavy 
breeds and will result in a continuation of heavy marketing weights. 

As of September 1, turkey breeder flock owners in 27 producing 
States indicated they planned to hold 4 percent fewer breeder hens 
on December 1 this year than in 1976. However, strong turkey prices 
this fall and prospects for significantly lower feed ingredient prices 
for the first half of 1978 will likely cause many breeder flock owners 
to alter their earlier plans. 

Producers are expected to step up poult production for marketing 
during the seasonally light period of January-June 1978 — perhnps by 
around a tenth. However, reduced cold storage stocks on January 1 
may result in total turkey supplies in the first half of 1978 showing 
only a small increase from a year earlier. Output during the second 
half of L978 may continue above 1977. but the rate of increase likely 
will narrow because of sharply larger pork output. 

Turkey prices have exceeded year-earlier levels this year. Through 
September, prices for 8-16 pound young hen turkeys at Xew York 



309 



averaged 51.6 cents per pound, 3 cents above a year earlier. The gap 
between this year's prices and 1976 prices has widened in recent months 
as supplies have dropped well below last year. October's prices for 
young hen turkeys at New York averaged 57 cents a pound, 6 cents 
above July and 9 cents above a year earlier. Turkey prices this fall 
are expected to average in the high 50's compared with 49 cents a 
pound during October-December 1976. 

Turkey prices in the first half of 1978 will decline seasonally from 
this fall's level but are expected to average near the 51 cents of Jan- 
uary-June 1977. Prices during the second half of 1978 probably will 
show less seasonal increase than usual and average well below this 
year because of sharply higher pork supplies and increased production 
of broilers and turkeys. 

Turkey stocks, although increasing seasonally, have declined rela- 
tive to a year earlier in recent months. On October 1, turkey stocks 
totaled 406 million pounds, 54 million below a year ago. Stocks nor- 
mally peak in November and then decline through the first half of 
the following year. Thus, yearend stocks may be the lowest since the 
early 1960's.' 

Exports of turkey meat this year are running substantially below 
1976. Through September exports of turkey totaled about 40 million 
pounds, down 14 percent from the comparable period of 1976. Exports 
were lower to nearly all countries, with the largest poundage decline 
to West Germany. However, there were large increases to Nigeria and 
Hong Kong. Exports picked up and exceeded a year earlier during 
July-September, but exports of turkey for all of 1977 likely will not 
match the 65 million pounds of 1976. 

Consumption of turkey meat for all of 1977 is expected to about 
match the 9.2 pounds per person in 1976. A drawdown in cold storage 
holdings is expected to offset lower production. 

THE OUTLOOK FOR EGGS 

Egg production is expanding in late 1977 and is expected to con- 
tinue to increase in 1978. Egg prices in 1978 will come under pressure 
from increased supplies and will likely average moderately below 1977 
levels. 

Egg production in 1977 has been well below earlier expectations 
because of the unusual weather and heavy culling of old layers in the 
first half of 1977. Through September of this year, egg production 
totaled 4.001 million dozens, down a little more than 1 percent from 
the same months of 1976. Early in the year cold weather caused output 
to droo sharply below year-earlier levels. Output bounced back in 
April-May but the unusually hot summer again reduced output. 

Also contributing to lower than expected production was the heavy 
cull of old layers in the first half of the year, apparently brought on 
the surge in feed prices and uncertainty about 1977 crops. 

Egg output has picked up since the weather moderated and moved 
above a year ago in September. Layer numbers and the rate of lay are 
gaining on a year earlier and should continue to inch upward in com- 
ing months. Layer numbers on October 1 totaled 280.3 million, up 
nearly 2 percent from a year earlier, while the rate of lay was about 



\ 



310 



the same as a year ago. The hatch of egg-type chicks last spring sug- 
gests that 6-7 percent more replacement pullets than a year earlier 
will be available to enter the laying flock during October-December. 
Thus, laying flock numbers on January 1 likely will be 2-3 percent 
above January 1, 1977, and output per layer may surpass a year earlier. 
The laying flock is relatively young because of heavy culling during 
much of this year. 

Layer numbers are expected to stay above a year earlier during most 
of 1978. even though the hatch of egg type chicks in recent months has 
slipped below year earlier levels. Chicks hatched during July-Septem- 
ber were down 2 percent, and eggs in incubrators on October 1 were 
down 6 percent from October 1, 1970. However, remember that the se- 
vere winter in 1977 caused increased mortality in both laying flocks and 
replacement pullets. Thus, lower mortality in early 1978 may result 
in more replacement pullets entering the laying flock in early 1978 
than a year earlier. Also the cull of old layers probably will not be 
as great as during the first half of 1977. 

Layer numbers during the second half of 1978 will largely depend 
on profitability during the winter and spring. If producers hold layer 
numbers 2 to 3 percent above a year earlier, egg juices likely would 
drop below the cost of production and marketing in early 197S. Pro- 
ducers could respond b} T stepping up culling of old laj^ers and reducing 
the number of layers being force molted. This would result in layer 
numbers declining relative to the previous year in the second half of 
1978. 

Domestic shell egg prices this year have been relatively weak since 
early in the year despite slightly smaller total egg production, in- 
creased use by commercial breakers and hatcheries, and large exports,, 
shell egg prices fell below a year earlier in April and have remained 
loAver. 

> Through September, prices of Grade A cartoned large eggs de- 
livered to retailers in Xew York averaged nearly 65 cents a dozen, 
3 cents below January-September 1976. Prices were well above a year 
earlier in early 1977 but dropped sharply below in the spring. Prices 
fluctuated during the summer — ranging from the micl-50'S to the mid- 
60's. Prices slipped further in early October to 52 cents a dozen before 
strengthening to 62 cents by late October. Egg prices may remain 
strong this fall as demand increases seasonally for the Thanksgiving 
and Christmas holiday seasons. However, the usual seasonal price in- 
creases will be limited by the expected increase in output. Xew York 
cartoned egg prices during the balance of 1977 likely -will average 10 
to 20 cents a dozen below the 81 cents a dozen for Xovember-Deeember 
1976. 

If egg production in the first half of 1978 runs 2 to 3 percent above 
1977 levels, as now seems probable, egg prices will continue below a 
year earlier. New York prices may average around 60 cents a dozen 
in the winter before dropping to the low r>()V in the spring! This would 
compare with 75 cents and 53 cents in the first and second quarters of 
1977. A continued expansion in egg output could result in egg prices 
in the second half of 1978 averaging in the mid-to-high f>0\s. This 
means that market prices for eggs likely would not cover the costs of 
production and marketing. 



311 



L .S. imports and exports are up sharply this year. Imports of shell 
egg S an( i egg products from January to September totaled 15 million 
dozens (shell equivalent)— up 13 million from the very low levels of 
1976. Most imports were shell eggs from Israel, Canada, and Mexico. 
Imports normally account for less than one-half of 1 percent of our 
total egg supplies. Although egg imports were up sharply, they were 
more than offset by gains in exports. Exports of shell eggs and ego- 
products during J anuary- August increased almost 20 million dozenlo 
16 million dozen, shell equivalent. Most o.f the increased exports this 
year were to Hong Kong and Venezuela. Exports in recent years have 
amounted to less than 1 percent of total egg supplies. 

Shipments of shell eggs and egg products to American territories 
through September totaled '20 million dozens (shell equivalent) down 
from 22.4 million a year earlier. Shell egg shipments were down almost 
2o percent to 15.6 million dozens, while egg products gained 81 percent 
to 1 million pounds. 

A bright spot in the egg industry this year has been the sharp in- 
crease in shell eggs going to breakers. Commercial egg breakers 
through September had broken 19 percent more eggs than the 440 
million dozen in the same months of 1976. Weekly reports indicate 
that breakings continued to run above last year through October. 

With the rise in egg breakings, stocks of frozen egg products moved 
above the very low levels of a year ago during J uly but are still well 
below other recent years. Cold storage holdings of frozen egg products 
totaled 34 million pounds on October 1, up 17 percent from a year 
ago but still a third below 2 years earlier. 



U.S. FLOCK SiZE* 



MILLIONS 



290 




270 




250 





APR. 



JULY 



OCT. 



* NUMBER OF LA VERS ON HAND. FIRST OF MONTH. 



USDA 



NEG ERS 619 77 1IO1 



OUTLOOK FOE FRUIT AND TREE NUTS 

(By Jules V. Powell, Agricultural Economist, Economic Research Service, TJSDA) 



General Price Prospects 

The 1977-78 season will be a banner year for most producers of 
fruits and tree nuts. Smaller supplies of most citrus crops, ample sup- 
plies of most noncitrus, and strong consumer demand are expected to 
keep prices for fresh and processed fruit this season 4 to 7 percent 
above 1976-77. 

Prices received by growers for fresh and processed fruit so far this 
year have averaged substantially above last year. The October index 
of prices received by growers stood at 221 (1967 = 100), up sharply 
from September's level. Higher prices were recorded for all fruits 
except strawberries. The seasonal increase in supplies of fresh fruit 
this fall will result in price declines from current levels, but the price 
index in the fourth quarter is still expected to average considerably 
higher than a year ago. Consequently, the 1977 index of prices received 
bv growers for fresh and processed fruit will average higher than in 
1976. 

The 1977 contract prices negotiated for most noncitrus fruit for 
processing are above those in 1976. This will push up the 1977 grower 
price index. Even with the larger apple crop, grower prices for apples 
for fresh market use are not expected to decline from 1976's high 
levels. Thus, the higher contract prices combined with the smaller 
output of pears and citrus fruit are likely to push the growers prices 
above 1976 levels through the winter. 

Retail prices for most fresh fruit have also ranged from about 5 to 15 
percent above 1976. The Bureau of Labor Statistics (BLS) September 
retail price index for fresh fruit stood at 180.4 (1967=100), one-tenth 
higher than in 1976. With the seasonal increase in supplies of fresh 
fruit, retail prices are expected to decline this fall. However, small 
supplies of citrus fruit combined with higher marketing costs will 
keep the retail fresh fruit price index moderately (4-7 percent) higher 
than in 1976. ^ ' ft 

Wholesale prices of canned fruit have been about 5 percent higher 
than last year. The BLS wholesale price index dipped in July attd An- 
gust, but strengthened again in September and October. The October 
index advanced to 181 (1967 = 100), 4 percent above a year ago. Tn re- 
sponse to good demand and tight supplies of frozen concentrated 
orange iuice,the wholesome price index for frozen fruits and juices has 
been well above 1^7c>. With higher prices of raw products and higher 
processing costs, wholesale prices of processed fruit items will remain 
higher through the winter. 

(312) 



313 



TABLE 1.— INDEX OF QUARTERLY PRICES RECEIVED BY GROWERS FOR FRESH AND PROCESSED FRUIT 



[1967 = 1001 



Year 


1st 


2d 3d 


4th 


1973 


123 


136 148 


142 


1974 


133 


140 148 


142 


1975 


129 


152 140 


130 


1976 


130 


134 127 


137 


1977 


124 


154 165 






Source: A£ricultural prices, SRS. 








TABLE 2.- 


QUARTERLY RETAIL PRICE INDEXES FOR FRESH FRUITS 






[1967 = 100] 






Year 


1st 


2d 3d 


4th 


1973 


_ 126 


142 148 


139 


1974 


138 


153 164 


149 


1975 


150 


171 177 


147 


1976 


146 


161 170 


147 


1977 


172 


190 193 







Source: Retail price, BLS. 

FRESH CITRUS FRUIT 



The first forecast of U.S. citrus production (except grapefruit in 
California, other than desert areas) for the 1977-78 season is estimated 
at nearly 14.3 million tons, down 6 percent from 1976-77 and 2 percent 
below 1975-76. Orange production is forecast to be 9 percent smaller 
than last year, but larger crops are indicated for Florida grapefruit, 
tangerines, and Temples. Tangelos are estimated to be the same as 
1976. 

The smaller orange output is mostly due to a drastic reduction in 
the early and midseason Florida orange crops, down 23 percent from 
last year's record crop and the smallest crop since 1971-72. The set 
of fruit on trees is the prime contributor to the production decline 
as a result cf last year's freeze. In addition, orange acreage is down 
somewhat in Florida. 

Price behavior for oranges during the 1977-78 season will depend 
on a number of factors. Acting to push the price up will be sharply 
lower carryover stocks of frozen concentrated orange juice. Increased 
consumer disposable income and higher prices for most competing 
fruits also will strengthen prices. In addition, export shipments of 
U.S. oranges during 1977-78 could reach the 1976-77 level. Trade 
reports indicate smaller orange supplies from the Mediterranean re- 
gion, especially Spain. Smaller supplies of competing fresh noncitrus 
fruit, especially apples, in Europe will also probably strengthen 
demand for oranges. Despite the smaller domestic crop, strong de- 
mand, and higher prices, the recent depreciation of the dollar relative 
to other currencies may make U.S. oranges a good buy to foreign 
buyers if current relationships are maintained. Consequently, current 
prospects for oranges through the winter months point to grower 
prices declining seasonally, but averaging moderately above year- 
earlier levels. These prices will show up at the retail level. 



314 



Supplies of grapefruit for 1977-78 are expected to total 3 million 
tons or 73 million boxes (for California, includes Desert Valley fruit 
only) . up 2 percent from last season. The large crop this season results 
from a record Florida crop. Florida's grapefruit crop is forecast at 
an all-time high of 54 million boxes, 5 percent above the previous 
record set last season. Arizona growers also expect to harvest a 3-per- 
cent larger crop, but the crop in Texas will be down 7 percent and 
the California Desert Valley crop will be 2 percent less than last season. 

( 'arryover stocks of most grapefruit products are up going into the 
1977-78 season. Both chilled and frozen concentrated grapefruit juices 
have shown good growth patterns in recent years. Processor demand 
for the new crop could be good. 

Domestic movement of fresh grapefruit during 1977-78 is expected 
to expand and exports should also register a gain over 1976-77. The 
export market is of vital importance to domestic producers. In view 
of the record crop in prospect, prices for grapefruit are expected to 
decline moderately from last year. However, improved export pros- 
pects this season might curtail downward price pressure. 

The Arizona-California lemon crop is forecast at 25.3 million boxes. 
1 percent less than last year, but 44 percent greater than the 1975-76 
crop. In mid-Oetober harvest was well underway in both States and 
quality was good. Arizona's crop, at 5.3 million boxes, is up slightly 
over last year, while California's crop, at 20 million boxes, will be 
down 3 percent. 

Total movement from August 1 through October 22 was moderately 
smaller than a year ago. Shipments to processors and export markets, 
so far this season, are down 20 and 12 percent, respectively, from a 
year earlier, but deliveries to the fresh market have been running 
ahead of a year ago. Reflecting a slightly smaller crop with a smaller 
proportion of large lemons than usual, f.o.b. prices for fresh lemons 
so far this crop year have averaged 17 percent higher than last year. 
Prions during 1977-78 season are expected to average moderately 
higher than during the previous season as both domestic and export 
markets for fresh lemons appear to be strong. 

PROCESSED CITRUS FRUIT 

With the record large 1976-77 citrus crop, utilization for processing 
reached another record of 11.5 million tons, 8 percent above the record 
set in 1975-76. Processing accounted for three-fourths of total utilized 
production, also a new record. More than four-fifths of the oranges, 
62 percent of the grapefruit, and 49 percent of the lemons were 
processed. 

Florida's 1976-77 pack of FCOJ amounted to 158 million gallons, 
siib.-iantiall v below 1975-76. This small pack was caused by the severe 
January freeze which seriously reduced the juice yield of oranges. 
Processors recovered only 1.07 gallons of 45° brix FCOJ per box from 
the 1976-77 crop, compared with 1.29 gallons in 1975-76 and 1.31 gal- 
lons in 1971-75. Juice yield is estimated to be 1.28 gallons per box for 
the 1977-78 crop. 



315 



Despite higher prices, movement of FCOJ has been very good. In 
anticipation of a record large 1976-77 crop, f.o.b. (unadvertised 
brands) had been as low as $1.60 per dozen 6-ounce cans last year. 
Immediately following the freeze most canners withdrew from the 
market. Major packers reentered the market with prices ranging from 
$2.20 to $2.40 per dozen 6-oimce cans, and on February 8 a major 
packer increased the price to $2.60 per dozen. Early November the 
f.o.b. price jumped to $3.25 per dozen 6-ounce cans (unadvertised 
brands ) . 

Despite this price escalation, movement of Florida FCOJ through 
October 22 had amounted to 188 million gallons, slightly above the 
rate of a year earlier. Consequently, packers' stocks on October 22 
stood at 42.8 million gallons, which was substantially less than the 
industry would like to have. If movement continues at the current 
pace of 3.0-3.5 million gallons per week (retail, institutional, and 
bulk), carryover stocks at the end of the season could be as low as 25 
million gallons. This prospect, plus the prospect of a smaller 1977-78 
crop with juice yields of 1.28 gallons per box, will keep supplies at 
moderate levels and prices well above year-earlier levels. 



The 1977 noncitrus fruit crop is forecast at 11.14 million tons, slightly 
below last year's level and 4 percent below 1975. However, cold stor- 
age holdings of fresh noncitrus fruit at the beginning of October were 
considerably larger than in 1976. Shipping point prices for most fresh 
noncitrus fruit are generally above a year ago. With the prospective 
good demand from processors, prices reeieved by fruit growers are 
expected to average higher than in the 1976-77 season. 

The October 1 forecast of the 1977 U.S. apple crop is 6.9 billion 
pounds. This is 8 percent above last year's freeze-damaged crop, but 
8 percent below the record 1975 total. 

Because of the late harvest, shipments of fresh apples are running 
moderately behind last year's pace. Even with a larger crop, available 
supplies of apples for fresh market are not likely to be substantially 

TABLE 3.— U.S. NONCITRUS FRUIT: TOTAL PRODUCTION, 1975, 1976, AND INDICATED 1977 



fresh xoxcrrrrrs 



[In thousand tons! 



Crop 



1975 



1976 



1977 



Apples 

Apricots 

Cherries, sweet. 

Cherries, tart 

Cranberries 

Grapes 

Nectarines 

Peaches 

Pears 

Prunes and piums. 



3, 748 
183 
152 
145 
104 

4, 379 
111 

1,421 
748 
650 



3, 198 
155 
173 
73 
120 

4, 304 
133 

1,509 
847 
630 



3, 440 
145 
147 
107 
108 

4, 196 
130 

1,446 
755 
661 



Total 



11,641 



11,142 



11,136 



Source: Crop production, SRS. 



98-723—77 21 



316 



larger. Processor demand is expected to remain strong during the 1977- 
78 processing season as processor inventories of canned apples and 
applesauce are small. 

Opening f .o.b. prices for fresh apples were generally mixed at major 
shipping points. Prices generally have been slightly to moderately 
below a year ago, but good processor demand combined with a smaller 
prospective citrus crop could dampen the downward pressure on prices. 
In addition, foreign demand for our fresh apples looks favorable. 
Apple production in Western Europe for 1977 is expected to be nearly 
one-fifth below the previous season which was considered as normal. 
Output in the two key exporting countries, France and Italy, is down 
•24 percent and 16 percent, respectively, from a year ago. Production in 
West Germany, a key importing country on the Continent, is down 23 
percent from last year. Export prospects to Canada, an important 
customer, may be off somewhat as the Canadian apple crop is expected 
to be up moderately from the 1976 level. 

This season's U.S. grape production is forecast at 4.2 million tons, 
3 percent under the 1976 total. In California, production is expected to 
total 3.9 million tons, only slightly ahead of a year ago. Larger crops 
of wine and table varieties more than offset smaller output of raisin 
varieties. 

Total grape production from States other than California and 
Arizona is now estimated at 283,720 tons, down 30 percent from 1976. 
New York, the second largest producing State, estimated a crop of 
98,000 tons, approximately half of last year's quantity. Substantial 
decreases from last year in grape production are also recorded for 
Ohio and Pennsylvania. 

Because of the late season, shipments of fresh grapes totaled 14.144 
carlots through mid-October compared with 17,198 during the same 
period last season. Consequently, shipping point prices for California 
grapes have been substantially above last year. In Kern County, Calif., 
Ribier was quoted at $8 per 23-pound lug in mid-October, compared 
with $6.25 a year ago. More Thompson Seedless grapes are expected to 
be dried for raisins. There is virtually no carryover of raisins from last 
year when the unusual September rain destroyed much of the raisin 
crop. Fresh grape prices could remain moderately to substantially 
above last year because of strong demand from raisin packers and 
wineries. 

Smaller available supplies of Bartlett pears have resulted in higher 
prices for both fresh market processing use. Growers and canners in 
California agreed to a field price of $120 per ton for No. 1 grade 
Bartletts compared With $105. in 1976. The Washington-Oregon Can- 
ning Pear Association reported the cannery price for No. 1 Bartletts, 
2 inches and larger, at $115 per ton, up 6 percent from a year earlier. 
Prices for fresh pears are expected to remain firm as the foreign market 
situation is also favorable. The 1977 pear crops in major producing 
countries such as France, Germany, and Italy are expected to be 
sharply below last year's large crops. In addition, the expected sub- 



317 



stantial decline in winter pear production in the Northwest will also 
strengthen the late-season market. 

PROCESSED XOXCITRtJS 

Despite the slightly smaller noncitrus crop, the 1977-78 pack of 
most noncitrus fruit is likely to be above that of a year ago. However, 
total supplies of canned noncitrus are still expected to be near last 
year's level because of smaller carry-in stocks at the beginning of the 
season. Dried fruit supplies will be larger. Supplies of frozen fruit 
could be moderately above a year ago. HoAvever, with higher costs 
of raw materials and processing, prices of most processed noncitrus 
items at all levels are expected to remain firm. 

The 1977-78 pack of most canned noncitrus fruit will probably be 
larger than last year. The total pack of clingstone peaches amounted 
to 27.0 million cases (24 Xo. 2i/ 2 's) compared with 22.8 million cases 
last year. Total pack of canned tart cherries is up 38 percent from 
1976, while that of canned sweet cherries is near last year's level. The 
canned apricots pack amounted to 2.3 million cases (24 Xo. 2%'s)., 
down moderately from last year. However, with the larger apple crop 
in major processing areas and smaller carryover stocks of canned 
apples and applesauce, the total pack of canned apple products will 
be above a year ago. The Bartlett pear pack will be smaller. 

In response to smaller supplies, wholesale prices of canned fruit 
during the first 10 months of 1977 have averaged moderately higher 
than a year ago. Likewise, retail prices of canned noncitrus fruit are 
ajso slightly to moderately higher. In view of higher costs of raw 
materials, processing and marketing, prices of most canned fruits at 
all levels are likely to remain higher. 

Exports of canned noncitrus fruit so far this season have shown 
a mixed pattern. Exports incroiised sharply from a year ago for canned 
peaches, pears, and fruit cocktail and dropped for apricots, pineapples 
and cherries. A smaller noncitrus crop in Western Europe is likely to 
enhance our exports, although the economic slowdown could be a 
moderating factor. 

U.S. dried fruit production for the 1977-78 season is expected to 
total above a year earlier when rains severely damaged the raisin 
variety grapes. Production of dried prunes, another major dried fruit 
item, is^currently estimated at 152,000 tons, moderately larger than 
last year. 

Wholesale prices of dried primes and raisins have been considerably 
above year-earlier levels. The BLS October wholesale price for dried 
prunes was $11.29 (16-ounce package, case of 24) compared with $9.91 
a year ago. The wholesale price of raisins in October at $16.05 (15- 
ounce package, case of 24) . dropped one-fifth from September but was 
still slightly above last year's net price. Prices for raisins are expected 
to average lower this season in view of the larger supplies. 

The U.S. pack of frozen deciduous fruits and berries is expected to 
surpass the 1976 pack of 587 million pounds. Through October 1, re- 
ceipts of domestic strawberries by California freezers totaled 176 mil- 



318 



lion pounds, sharply more than 140 million pounds a year earlier. 
During the first 8 months of 1977, imports of frozen strawberries 
amounted to 39,700 metric tons, more than double last years small im- 
ports. Imports from Mexico are expected to remain above 1976 for the 
balance of the year as total production of strawberries during 1976-77 
returns to more normal levels. Furthermore, for the 1977-78 straw- 
berry season, the area planted to strawberries in Mexico is expected 
to reach 5,200 hectares, an increase ox 11 percent from 1976-77. 

Cold storage holdings of frozen fruits and berries (excluding juices) 
on October 1 totaled 627 million pounds, one-fifth larger than a year 
earlier. Despite a substantial increase in frozen stocks, the BLS whole- 
sale price of frozen strawberries has been steady at $4.94 per dozen 
10-ounce packages since July. Because of larger supplies, current indi- 
cations point to declining prices during 1977-78. 

TREE NUTS 

The total crops of the four major domestic tree nuts (almonds, fil- 
berts, pecans, and walnuts) are estimated to be 603.500 tons (in-shell 
basis), substantially larger than last season. A pecan crop sharply 
larger than the very small crop last year, plus large crops of almonds 
and walnuts are responsible. Prices for almonds and walnuts are higher 
than last year. Prices for pecans will probably decline from high 
opening levels. 

PER CAPITA FRUIT CONSUMPTION 

Civilian per capita fruit consumption in 1976 reached 221.4 pounds 
(fresh weight equivalent), the highest level since 1946. This level was 
7.8 pounds, or nearly 4 percent above 1975. The increases were shared 
by both citrus and noncitrus fruit. 

The per capita consumption of all fresh fruit increased from 83.7 
to 86 pounds between 1975 and 1976 due entirely to the increase in non- 
citrus consumption. Consumption of fresh noncitrus fruit increased 3 
percent because of increased consumption of apples and bananas. The 
consumption of bananas rose to 19.5 pounds per person, and that of 
apples — the second most popular fruit — rose to 18.7 pounds. Per capita 
consumption of fresh citrus decreased 0.6 pound to 29.2 pounds in 
1976. 

Per capita consumption of processed fruit increased from 129.8 
in 1975 to 135.7 pounds in 1976, due mostly to increases in the con- 
sumption of frozen and chilled citrus juices. 

However, preliminary data indicate that per capita^ consumption 
of fresh fruit will decline to 82.6 pounds per person in 1977 due mostly 
to the reduced fresh apple and orange supplies available during 1977. 
Consumption of fresh apples is expected to dip to 17.9 pounds per 
person for 1977 and fresh citrus consumption will probably be about 
26.5 pounds per person. Data are not available on the per capita con- 
sumption of processed fruit items. 



319 



CITRUS FRUIT PRODUCTION 
AND PRICES 

% OF 1960 I I I 




bOl I I I I I I I I I I I I I I I I 1 I 

1960 '63 '66 '69 72 75 * 78 

CROP YEAR 



* INCLUDES PRODUCTION OF ALL CITRUS FRUITS. SEASON AVERAGE PRICE TO GROWERS. 
' PRICE WEIGHTED BY PRODUCTION. A PRELIMINARY 

USDA NEG. ERS 2042-77(4) 



NONCiTRUS FRUIT PRODUCTION 
AND PRICES 



% OF 1960T 




1960 '62 '64 '66 '68 70 72 74 76 78 



*I5 IMPORTANT FRUITS °SEASON AVERAGE PRICE TO GROWERS. 
PRICE WEIGHTED BY PRODUCTION. ^PRELIMINARY. 



USDA 



NEG ERS 8485-77(8) 



OUTLOOK FOR VEGETABLES AXD POTATOES 

(By Charles W. Porter, Agricultural Economist, Economic Research Service, 

USDA) 



FRESH VEGETABLES 

Fresh market vegetable prices to growers averaged sharply higher 
for the first half of 1977 because of the Florida freeze plus reduced 
shipments from Texas early in the year. Increased supplies in late 
spring and summer pushed prices down rapidly, and for the summer 
quarter of 1977, the fresh vegetable price index actually dropped a 
point below the same period of 1976. 

For- the rest of 1977, a slight seasonal price rise may be expected, 
with prices averaging slightly less than the fourth quarter of last year. 
Retail vegetable prices in 1977 followed grower price trends, though 
not in as volatile a pattern, rising less, but falling less somewhat later. 
This relationship is the usual pattern. For the third quarter, the index 
of retail fresh vegetable prices is 178 (1967=100), a figure 7 percent 
more than the comparable quarter of 1976. Fourth quarter retail prices 
may rise slightly, yet hold close to or a little above a year earlier. 







FRESH VEGETABLE PRICE INDEXES 


% OF 1967 




200 








Farm pnce^^ 




150 








Retail price 










100 






B0 









1 1 1 1.1 








1969 1971 1973 1975 1977" 1979 1981 


*FiRST MONTHS *D£RIV£0 FROM BUREAU OF LABOR STATISTICS 'EXCLUDING POTAIUESi 


°COMMERCIAL VEGETABLES FOR FRESH MARKET. SRSUSDA. 


USDA 


NEC. f RS ??36 7 7 


(10' 



(320) 



321 



Even though water will remain critically short in California 
through the fall, enough will continue to be available to bring in 
ample supplies of vegetables. This past summer, California vegetable 
producers drilled deeper wells, shifted production areas, and, in some 
instances, traded water with other growers in order to bring in vege- 
table supplies close to the market's normal needs. Also, some growers 
in other States planted more in anticipation of short supplies from 
California. As a result, supplies of many crops were adequate to 
generous this summer, despite the drought in the leading vegetable 
producing State. 

Fall acreage ancl supply prospects 

Fall fresh vegetable acreage in the United States is 5 percent larger 
than a year earlier, which would mean 6-percent larger tonnage if 
yields follow the recent historical average. These data include 14 crops 
but omit melons. The crops that show the greatest acreage and/or 
potential production gain are snap beans, broccoli, cabbage, carrots, 
cauliflower, cucumbers, eggplant, lettuce, peppers, tomatoes, and Flor- 
ida sweet corn. Prospects are for less celery, spinach, and California 
sweet corn. 

PROCESSED VEGETABLES 

Contract acreage devoted to processing vegetable crops was 4 per- 
cent larger this year as there was a need to replenish frozen vegetable 
stocks, and a few canned items like beans ancl beets were on the light 
side. However, raw product tonnage from this acreage is a whopping 
18 percent greater this year, despite the threat posed by drought in 
California, the Pacific Xorthwest. and parts of the upper Midwest. 
This suggests that many individual producers successfully managed to 
solve their water supply problems, and that heavy production of to- 
matoes and sweet coin has resulted. 

Much of the gain in tonnage is coming from California tomatoes 
which do not directly compete with other fresh and processed vegeta- 
bles. However, not all this increase for 1977 is associated with toma- 
toes. There are also larger crops of lima beans, snap beans, sweet corn, 



FRESH VEGETABLE SUPPLIES 1 
[In thousand hundredweight! 



Supply 



1976 1977 



U.S. winter production 34,149 29,680 

U.S. spring production 58- 9<g 7 j\ 

U.S. spring onions .jj-j™ 

Imports (January to June 14, 006 lb, bi3 

Total 6 mo. supply. 114,230 112,396 

U.S. summer production ^341 = JJ- |g| 

U.S. fall production }J "7 J 46, 866 

U.S. spring onions 20,810 19, /06 

Imports (July to December) _ 



Annual supply 246,579 

Percent . 



±1 



1 Includes melons. 

2 Based on historical average yields* 
NA = not available. 



322 



and boots — items which are often substituted one for the other, de- 
pending on price and availability. For example, the large pack of 
canned sweet corn expected this year probably will have some effect on 
prices of peas, snap beans, and other canned items. 

The total supply (pack plus carryover) of canned vegetables for 
1977-78 at this time looks to be about 2 to 4 percent larger than a year 
earlier and nearly equal to 2 years ago. This estimate excludes most 
tomato products but includes pickles and sauerkraut. 

Wholesale prices for canned vegetables rose steadily between March 
and August. With promotional allowances and off-the-line price cuts 
numerous, it is now likely that prices will average either the same or 
barely higher than in late 1976. In contrast, wholesale prices for most 
frozen Aegetables range at least moderately to substantially higher 
this fall than last. It appears that there will be fewer promotional al- 
lowances for frozen vegetables than for canned, as the supply picture 
shows signs of being adequate but certainly not excessive. Stocks of 
frozen vegetables on October 1 were 1.6 billion pounds, 1 percent less 
than a year earlier. 

Processing vegetable acreage in 1978 is likely to be moderately small- 
er as less tomatoes and corn will be needed for expected market needs. 
These crops account for about two-thirds of all processed vegetable 
tonnage. Some additional acreage of snap beans could easily be accom- 
modated, along with a moderately larger acreage to be devoted to 
freezing of peas. 

POTATOES 

The U.S. fall crop production of 303.6 million hundredweight is in- 
dicated 1 percent smaller than the record crop of 1976. and area for 
harvest unchanged from last year. Yields were slightly lower, 266 
hundredweight versus 269 hundredweight in 1976. 

In the eight Eastern States, fall production 7>1.6 million hundred- 
weight is 2 percent above a year earlier although yields were below 
those of last year. Blight, a major problem in southern Aroostook 
County, forced many growers to kill vines and harvest some fields 
earlier than normal. In addition, wet weather during harvest caused 
some acreage loss and rot is evident in some fields. Heavy rains 
throughout September restricted harvest in New York and stand- 
ing water caused some quality problems. In Pennsylvania, harvesting 
was also frequently interrupted because of excessive moisture. 

In the eight Central States, production 13 percent more than a year 
earlier at 64.6 million hundredweight. Yields were above; those of 1976 
and 21.000 more acres were harvested than a year ago. Wet weather 
delayed harvest in many areas of Michigan. While (he Red River 
Valley area of Minnesota and North Dakota had some interruptions 
in harvest ing because of rain, the quality of the crop is good. 

Production in the Western States at 187.4 million hundredweight is 
6 percent (ess than last year. Both acreage and yields were lower than 
last year. Quality of the crop is generally good. Rains have caused 
sonic delays in harvest in northern California. 

Pria cmd supply 'imp lications 

With a fall crop only 1 percent smaller than last year's record 
high, grower prices in the fourth quarter will remain iow and hold 



323 



close to those of a year earlier. Some gradual price improvement from 
the October figure of $3.12 may develop as the storage season pro- 
gresses. If so, U.S. average prices to growers would then be following 
last year's pattern between now and early April. The April 1977 
average price was $1.10 per hundredweight. Had it not been for blight 
in Maine and untimely rains in several Eastern and Midwestern dis- 
tricts, the crop might have turned out even larger. Markets were 
cleaning up summer supplies which helped the grower price situation 
to some extent, but with export demand reverting to the usual pat- 
tern, and processing activity only moderately strong, the market lacks 
the brisk pace of a year earlier. Demand for potatoes for freezing 
purposes is expected to be well maintained, but demand for dehydrated 
products is likely to continue sluggish. 



PROCESSED POTATO USE 




30 60 30 1 20 150 180 



MIL. CWT. 



Winter acreage up l.Jp percent 

Growers in California intend to plant 11 percent less acreage for 
harvest in the winter quarter of 1978. On the other hand, Florida 
growers intend to increase their acreage for harvest by 8 percent to 
9.800 acres. Overall, the intended winter quarter acreage is 1.5 percent 
above that for 1977. In light of the present estimate of 1977 fall crop, 
Florida growers may reassess their intentions. 

Per capita use to recover 

Total per capita potato use declined in 1976. but is expected to 
recover as record large stocks were carried over the current year. Per 
capita processed potato consumption fell slightly in calendar year 
1976, the first drop in 20 years of statistical record. It was due to 
smaller January stocks of 1975 crop, plus record export activity in 
dehydrated products. Frozen products have continued making annual 
gains thus far in the 1970's, while chip use has eased downward 
slightly, though some recovery was shown in 1976. 



324 



PER CAPITA CONSUMPTION 
OF POTATOES 

POUNDS 




1985 

1977 PRELIMINARY 



PRODUCTION AND PER CAPITA CONSUMPTION OF POTATOES, 1960-76 



Year 



Per capita consumption (pounds) 



Production 

(million Total 
hundred- fresh and 



Processed 1 



Chips and 

weight) processed Fresh Total Canned 2 Frozen shoestrings Dehydrated 



1965 291.1 107.0 68.2 38.8 1.7 14.3 15.8 7.0 

1966 307.2 116.8 72.4 44.4 1.7 17.3 16.7 8.7 

1967 305.8 108.0 62.0 46.0 1.7 19.0 16.9 8.4 

1968 295.4 115.2 65.9 49.3 1.9 21.2 17.1 9.1 

1969 • 312.4 116.8 61.6 55.2 2.0 24.6 17.7 10.9 

1970 325.8 117.6 58.4 59.2 2.0 27. t 17.7 11.8 

1971 319.4 118.9 57.0 61.9 2.2 30.3 17.3 12.1 

1972 296.0 119.2 57.2 62.0 2.1 30.6 17.0 12.3 

1973 299.4 116.5 51.6 64.9 2.3 33.2 16.6 12.8 

1974 342.1 114.2 48.3 65.9 2.3 33.0 16.1 14.5 

1975 319.8 121.9 54.6 67.3 2.1 34.8 15.9 14.5 

1976 3. 357.4 115.4 50.2 65.2 2.0 36.9 16.2 10.1 



1 Fresh weight bases. 

J Includes potatoes canned in soups, stews, and other combinations. 

2 Preliminary. 



Ml'STIROOMS 

U.S. mushroom production sot another record in lOTfi-TT — moving 
up 12 percent over :i year earlier to 347 million pounds. Pennsylvania, 
the leading State, accounted for 199 million pounds or 57 percent 



325 



of the U.S. total. The U.S. average yield of 2.9 pounds per square 
foot is the highest yield attained in the years since annual data have 
been published. 

Fresh market sales of mushrooms at 151 million pounds increased 
less this past season than in other recent seasons. Gains, nontheless, 
were 6 percent over a year earlier and fresh use absorbed 44 percent 
of U.S. output. The average price received by growers reached 82 
cents a pound for fresh use, the highest price of record. 

For the first time in several years, domestic canned pack data are 
available. The International Trade Commission (ITC) recently esti- 
mated that 101.5 million pounds of brine-packed mushrooms were 
packed in the United States between July 1, 1976, and June 30, 1977. 
The data for 1975-76, when 67 million pounds were reported, are not 
exactly comparable, but it would appear that the latest pack probably 
was record large. 

Further gains in mushroom use may be expected during 1977-78 
as growers recently stated they intend to increase bedding space by 
10 percent, and import activity is expected to be at least reasonably 
well maintained. 

DRY EDIBLE BEANS 

U.S. bean production estimates for this year declined during Sep- 
tember. The crop is now estimated at 16.1 million hundredweight, 
7 percent less than last year. Generally speaking, there are likely to 
be about the same supplies of white beans, but reduced supplies of 
colored classes. It is largely a question of a few more navy beans in 
Michigan, fewer great northerns from Nebraska, and smaller crops 
of pintos in the Rocky Mountain States. 

Total supplies of white classes may not be greatly different this 
year as wet fields have caused substantial loss of Michigan navy 
beans. A few fields may not be harvested, and other fields which once 
had been thought to be carrying an ideal crop, turned out average or 
less than average yields. Untimely wet weather also reduced prospects 
for pinto beans in the Red River Valley. 

The U.S. average grower price for all classes of beans jumped 
sharply between September and October moving from $13.80 per 
hundredweight to $22.20. Supplies are generally adequate to meet 
normal domestic needs, but if brisk export trade should develop, fur- 
ther price rises would be expected. Export prospects for white beans 
appear relatively favorable, but with Mexico expected to export sub- 
stantial tonnage in 1977-78, foreign demand for U.S. grown pintos 
and other colored classes may not be too strong. 

For 1977-78 there is the prospect of sales development in the Near 
East and certain Mediterranean countries. Recent attache reports 
note that Spain seems likely to depend more on imports of dry beans 
than on domestic output. This coming season, Belgium and the 
Netherlands are likelv to be buying a good volume of white beans from 
the United States, although there will be some Ethiopian competition. 
Exportable supplies of white beans from Argentina are limited until 
the new crop becomes available next spring. The old crop (spring 



326 



1977) was small. The Canadian crop of pea beans which competes 
with Michigan in export markets is expected to be at least a third 
less than last year's crop. But the attache in Tokyo reports th a for 
the year beginning October 1, import quotas will be smallei in view 
of increased domestic bean output and a relatively larger quantity 
expected to be carried over. 



FAMILY LIVING 



THE OUTLOOK FOR THE LABOR FORCE : IMPLICATIONS 

FOR FAMILIES 

(By Deborah Pisetzner Klein, Office of Current Employment Analysis, Bureau 
of Labor Statistics, USDL 1 ) 



In recent years we have all heard on television and read in news- 
papers and magazines about the demise of the American family. 
Stories on rising levels of marital disruption due to divorce and sepa- 
ration and the prevalence of nontraditional living arrangements 
among young people have fined the media. These stories were clearly 
based on facts and reflect real changes in living arrangement 
for many people. However, most people continue to live in families. 
Among the 71 million households in the United States, there are about 
56 million families. (The remaining households consist of persons who 
live alone or with persons to whom they are not related.) 

Nevertheless, it is important to recognize that great social changes 
have occurred within these families. One important facet has been 
alterations in labor force behavior. The "typical" family is often il- 
lustrated as a working husband, a homemaker wife, and two children. 
This family type is now far from typical. In fact, in 1976, only 6 per- 
cent of all families conformed to this pattern. Even more surprising 
is the fact that only 15 percent of American families depended on a 
single earner and consisted of a working husband, a wife who did not 
engage in market work, and any number of children under 18 years 
of age. 

Why is the single earner 4-person family so atypical? In part, it is 
because some families have passed through this stage or have yet to 
enter it. Also, the rising divorce rates that have been mentioned earlier 
have had an impact. But the most important change is that there are 
now more multiple earner families than single earner families. And 
the major cause of that statistic has been the phenomenal increase in 
the labor force participation of married women. 

Since 1050, the proportion of women engaged in or seeking market 
work climbed from about one-third to nearly one-half. While the over- 
all surge has been generally steady, noticeable differences occurred in 
the timing for different aire groups. Prior to World War II. the high- 
est rates of female participation were among the young, because most 
women left the paid labor force upon marriage. In the postwar era, 
this pattern changed. There was a sizable jump in the participation 
of women age 45 to 59, the group which had largely completed the 
time-consuming portion of their child-rearing responsibilities. 

1 This paper draws upon the work of many staff members in the Office of Current Employ- 
ment Analysis. In particular, the author would like to note the contribution of Robert W. 
Bednarzik and Allyson Sherman Grossman. 

(329) 



330 



Since the mid-1960's, the greatest labor force increases have occurred 
among women under age 45. These women, who often have young 
children, apparently did not decide to pursue market work until at- 
titudes changed toward working mothers. 

Furthermore, changes in fertility and childspacing patterns during 
the 1960's are associated with the increased likelihood that those in 
their twenties would work. Currently, about 60 percent of women in 
their twenties, and more than half of those 30 to 45. are in the labor 
force. Among those over 55, there have been small declines in the 1970's, 
indicating that some women may be choosing earlier retirement. 

The dramatic increase in female labor force participation is related 
at least in part to an overall decline in participation among men. While 
the male rate remains substantially above the female rate, the gap has 
narrowed considerably, particularly at the younger and older end of 
the age spectrum. Clarence Long postulated as early as 1958 that the 
trends in male and female participation were related: ''Women may 
have both pushed and pulled young and elderly males from the labor 
force, to some extent seeking jobs that had been or were being sought 
by males, and to some extent being drawn into the labor force by the 
vacuum left by the exodus of males for other reasons." He went on to 
suggest that better trained (and lower paid) women may have dis- 
placed older men, and the financial assistance of a working daughter 
or wife possibly permitted the man to retire at a younger age. 

Thus, the biggest changes among men have occurred in the older age 
groups and have been attributed primarily to earlier retirement. For 
example, more than two-fifths of men over age 65 were in the labor 
force in 1950. compared to only one-fifth in 1970. The rate for men 55 
to 64 dropped from 87 to 75 percent over the same period. Participa- 
tion rates remain well above 90 percent for men in the prime working 
ages — 2j5 to 54 years — but even in the<e age groups there have been 
some slight declines, most noticeably since the mid-1900-s. 

Let us return to our focus on the family. Just as changes in labor 
force behavior affect family dynamics, so have changes in rates of" 
family format ion and dissolution contributed to the labor force statis- 
tics just discussed. Single men. for example, have a lower rate of labor 
force participation than do other men. and their increasing proportion 
in the population has contributed to lower participation for men as a 
whole. Similarly, the increased proportion of divorced and never mar- 
ried women have contributed to greater overall female labor force par- 
ticipation because these groups are generally more likely to engage in 
paid work. Nevertheless, the most dramatic increases in female labor 
force participation have occurred among wives — the number of mar- 
ried women in the labor force nearly tripled between 1950 and 1970. 
One important factor in this development was fertility patterns. 

From the m.id-1950's to the present, the 1'erl ility of American women 
dropped from near record highs to record lows. Thifi decline in fer- 
tility, which, of course, translates into smaller families, is also associ- 
ated with the increase in female labor force participation. In the mid- 
1970's only about one-third of tin 4 wives with three children or more 
under age 15 were in the labor force, compared with about half of the 
wives with only one child in that age group. Nevertheless, despite the 
presence of children, even young children, women are working in 



331 



record numbers. For example, the proportion of married women in the 
labor force with school age children nearly doubled between 1950 and 
1976 and the participation rate of wives with preschool children 
tripled. 

Looking at the figures another way, from the perspective of the 
children, we can see that about 45 percent of all children living with 
two parents had a working mother. Younger children are less likely 
than older ones to have working mothers. Only about one-third of 
the preschool children living in husband-wife families had working 
mothers, compared with nearly half of those 6 to 13 years of age and 
more than half of all those 14 to 17 years. 

Family responsibilities also affect the labor force status of men, 
but in different ways. Regardless of the presence or number of chil- 
dren, nearly all married men between 25 and 55 are in the labor force. 
Furthermore, married men in these ages are more likely than other 
men to w T ork long hours and to hold second jobs. Reflecting the fact 
that family responsibilities increase the need for family income, 34 
percent of the moonlighting married men but only 15 percent of other 
men had taken their second jobs to meet regular expenses. 

Studies have indicated that the impact of children on the labor 
market activities of men is greatest in the older years when many 
delay retirement until their last child leaves home or completes school. 
This hypothesis is supported by William G. Bowen and T. Aldrich 
Finegan's finding that the larger the family, the higher the participa- 
tion rates of married men over age 55. 

We cannot discuss family labor force behavior without focusing 
on another type of family — those headed by a woman. These families 
are most often single parent families that consist of a mother and her 
children. Since 1970, the number of such families increased by one- 
third to 7.5 million in 1976. Currently about 1 out of every 8 families 
are headed by a woman and about half of these women are in the 
labor force, where they face higher than average unemployment. 

About half of the female family heads are either divorced or sepa- 
rated from their husbands, about one -third are widowed, and the re- 
mainder have never been married. (Married women living with their 
husbands are not included in this classification.) Divorced women have 
the highest labor force participation of any marital category. The 
proportion working is particularly high — about 80 percent — for di- 
vorced women with school age children (and no children younger). 
Separated women have a lower participation rate; about 60 percent 
of separated women with school age children (and none younger) are 
in the labor force. Widowed women have the lowest rates of labor 
force activity. These women tend to be older, many of them above the 
typical retirement age, and they often have other financial resources 
such as social security payments. 

Separated women face very high jobless rates, in part because they 
are relatively younger, less educated, and have more and younger chil- 
dren. Unemployment among divorced women averages just a little 
bit higher than that of wives. 

Looking at the employment status of family members in relation 
to each other we see some further conformation of the extent to which 



98-723 — 77 22 



332 



traditional assumptions about the family no longer hold true. For 
example, less than half of all husbands are the only breadwinner in 
the family. Perhaps even more striking is the fact that about one- 
tenth of employed wives are the only earner in their family. Thus, 
when a husband becomes unemployed the chances are about 50-50 
that there is someone else in the family who is holding down a job. 
For unemployed wives, of course, it is more likely that some other 
family member is employed. Nevertheless in about 15 percent of fam- 
ilies where the wife is unemployed, there is no other working member. 
Furthermore, wives with unemployed husbands are about 3 times 
as likely as other wives to be unemployed themselves. The situation 
is very severe among unemployed female family heads — more than 
80 percent of them have no one else in their family who is employed. 

The labor market problems of female headed families are under- 
scored when we look at the unemployment rates of relatives in these 
families, primarily teenage and young adult children of the head. 
Their rates are much higher than those of comparable young people 
living in husband-wife families, and they are less likely to live in a 
family that includes a working member. 

As we have seen, the family with more than one earner has become 
prevalent throughout the Nation. The phenomena has had pronounced 
effects of the living standards of American families. Thu^ in 1976 the 
median income of all husband- wife families was $14,870. For husband- 
wife families with wives in the paid labor force the median income 
was $17,240: this was 35 percent higher than the median income for 
husband-wife families in which the wives were not in the paid labor 
force. A recent publication by Paul Glick and Arthur Norton indi- 
cated that while most husbands earn considerably more than their 
wives, this is not universally the case. In about two-thirds of all fam- 
ilies where both husband and wife worked in 1075, the husband had 
"perceptibly higher" earnings. In the remaining third the wife earned 
about what her husband did or more. It should be noted, however, 
that in most cases where the wife appreciably outearned her husband, 
his earnings were relatively low. 

In part because of the relatively fewer members of working acre, 
families headed by one adult, either male or female, have lower in- 
comes than husband-wife families. Female headed families, in par- 
ticular, have very low incomes — a median of $6,840 in 1976. Further- 
more, more than one-third of all female headed families bad incomes 
under $5,000 in 1976, compared with 13 percent for families headed 
by a man (with no wife present) and 8 percent for husband- wife 
families. 

Looking ahead. — It seems reasonable to conclude' that develop- 
ments in family formation, multiearner families, income needs, edu- 
cational attainment, and retirement patterns will not reverse the 
current trends of increasing participation among women and decreas- 
ing participation among men. These labor force developments will 
have substantial impart on the family. For example, the most recent 
Bureau of Labor Statistics projects indicate that between 1975 and 
1990 nearly 12 million women will be added to the labor force. Since 
most of the increase is expected to occur among women in the central 



333 



ages — 25 to 54 — and since the majority of these women are married, 
we can anticipate that the trends described above will continue, that 
is, more families will have more than one earner and a greater pro- 
portion of children will have working mothers. The decline in the 
participation rate for men over 55 years of age, which is projected 
to continue, may have implications for the financial well-being of 
families at the older age of the spectrum. 

These developments tend to reinforce each other. Thus, as women's 
participation in the labor force is increased, they are more likely to 
become even more firmly attached to the labor market, unwilling to 
give up the income needed to maintain or increase consumption in 
the wake of rising prices or to leave promising careers to raise a family 
on a full-time basis. Moreover, any tendencies on the part of women 
To become more established in the work force would tend to increase 
the flexibility of men's labor market experience. For example, with 
additional family retirement income, men as well as women could 
retire at an earlier age. The presence of wives and younger family 
members in the labor force cushions the impact of male unemploy- 
ment on the family. This could permit the labor force participation 
of men to become more responsive to economic conditions than it has 
been in the past. 

While these trends are exciting to contemplate, we must guard 
against pushing them too far into the future. The longer the perspec- 
tive we try to take, the more likely that unforseen events will have an 
impact. 



OUTLOOK FOR METRICATION 



(By Michael F. Thompson, 1 Program Administrator, American National Metric 

Council (ANMC) ) 



On December 23, 1975, President Gerald R. Ford signed the Metric 
Conversion Act of 1075, which ensures that considerable resources of 
the Federal Government will be employed to help bring about an effi- 
cient and economical transition to metric usage in the United States. 
The approval by the President and Congress marked a culmination of 
a legislative history which began back in 1866, with legalization of the 
metric system for the United States. 

Frequent attempts were made over the past century to adopt the 
metric system as America's primary language of measurement. Action 
was postponed each time, partly because the metric system was not 
then in use by our major trading partners abroad. Now with every 
other major nation converted to the metric system, this obstacle has 
been removed. 

In 1968, Congress authorized a study by the U.S. Department of 
Commerce to determine the effects of metrication on the American 
economy. A report of this study was issued in 1971 which recognized 
the inevitability of change and recommended that conversion be well 
planned. The 94th Congress saw fit that metric legislation was ap- 
proved by the House (September 5, 1975) and the Senate (December 8, 
1975). The act has several major features. To summarize,: ". . . the 
policy of the United States shall be to coordinate and plan the in- 
creasing use of the metric system in the United States." A 17-member 
U.S. Metric Board is established to assist in planning and coordina- 
tion of the changeover. The Board will contain representation from 
all sectors of the economy and will report annually to the President and 
Congress. 

Another major feature of the bill is that the conversion will be 
voluntary. In other words, without explicit Government mandate, 
conversion will evolve within the private sector, within the Federal 
Government but without hard and firm timetables. Each sector of the 
economy will convert at its own speed based upon its own needs, oppor- 
tunities, and constraints. Thus there is no specific timetable for national 
conversion of metrication. Individual timetables are being developed 
for specific industries and will continue to be developed. The act has 
laid down guidelines for the Board but it remains how the Board will 
function and just what influence it will have on the process of 
conversion. 



\ M( 1,f vIews ex P resse(1 In tnis paper are those of the author and not necessarily those of 

(334) 



335 



If you were to ask any American today on the streets of Washington, 
Chicago, Seattle or whatever: "What are your views on metrica- 
tion?". . . the answers would vary greatly. Many Americans have 
spoken out, many important Americans, many average Americans. 

Noted columnist Abigail Van Buren has seen fit to also speak out 
recently on metric conversion. 

Dear Abby : I am boiling out and need to let out some steam, 
so you are elected. When I start thinking about that metric 
system they (whoever they are) want to put over on us Amer- 
icans, I get so mad I can hardly contain myself. It will cost 
millions of dollars to change textbooks and other publica- 
tions, not to mention highway signs. Our system was good 
enough for our forefathers and it's good enough for me. If 
our neighboring countries don't like us to be different from 
them, let them change their system. It's too hard for us older 
people to change. I'm 82 and proud of it. Signed . . . Mad in 
Alabama. 

Interestingly enough, Abby wrote back . . . 

Sorry oldtimer, but the United States is the only major 
nation in the world still clinging to pounds, inches, gallons 
and acres. The whole world is adopting the metric system of 
weights and measures and the benefits to this country of pro- 
moting an international language of measurements are too 
numerous to detail here. 
I will not also attempt to give a long litany of the benefits of con- 
verting to the metric system. Several publications, noted authorities 
and other sources will detail this information if you are still in doubt 
of the need and value of metric conversion. The Metric Board recently 
was named by President Carter and is now being reviewed by the U.S. 
Senate. I would expect that the Metric Board would meet sometime 
early in 1978 and take its position to coordinate the voluntary con- 
version. 

Let me take a look back . . . Where are we in going metric in 
America ? Do Ave have metric products ? Is it really this foreign or alien 
system which some of us claim? Are we that far away from total 
conversion? Recently, the Federal Highway Administration an- 
nounced a plan for conversion of highway signs. Unfortunately, this 
plan was lacking in many ways and did not reflect the. best judgment 
of many experts involved with metrication. As expected, a plan which 
is not top quality and lacked adequate communication, being presented 
to the public would receive considerable adverse reaction. This is a 
clear lesson to agencies, industry and to Americans in general that if 
we are to move toward the metric system, we must do it in a well- 
coordinated and cost-efficient manner. The Federal Highway Admin- 
istration metric conversion plans have been tabled. This is not the end 
for metric conversion. 

The National Weather Service has also announced a plan for metric 
conversion. This plan was reviewed at a June meeting, open to all par- 
ties. Maybe substantive comments were received and the officials at 
NWS have reviewed and incorporated these into the revised metrica- 
tions plans for the National Weather Service. This initial step to secure 
comments from educators, consumers, the media, industry, and others 



336 



was most valuable. The plan was revised, delayed slightly, and re- 
flected the best interest of all concerned parties. Now we're presenting 
this plan to the entire membership of the broadcast industry. The UPI 
Newspaper Advisory Board recently commented on the plan and en- 
dorsed a revision which would extend the period of duality. Many 
other organizations have commented on this and the Weather Service 
plans have grown and will receive a much better reception from the 
general public. The plan will ultimately be reviewed and approved by 
the U.S. Metric Board prior to its implementation. 

PROPOSED METRICATION OF 
WEATHER REPORTING TO THE PUBLIC 



Conversion Schedule 



Beard 
Approval 



197S 1980 

Jun Sap Dec Mar Jun 



Temperature 
Precipitation 
Windspeed 

Distance, Pressure I 
AS! Other Elements 











: 




Approximately 
12 Months 


■■■■ 














B SB 15 WD 















.... 


— 




m 


rrr >i i 









Public Awareness Program 
Dual Units and intensive Education Program 
— Metric Units Only 



Here we can see the difference between two agencies. Metric con- 
version is no different than any other change that has taken place in 
America. Conversion must be logical, timely, cost effective, and fore- 
most beneficial to America. 

The American National Metric Council is a national nonprofit orga- 
nization established in 1973 under the private sectors initiative. Ini- 
tially under the auspices of the American National Standards In- 
stitute ANMC established sector committees dealing with conversion 
in various aspects of the economy. ANMC is involved with planning, 
coordinating and implementing the voluntary conversion to the metric 
system. We currently have over 2,000 corporations, organizations and 
individuals subscribing to the services of ANMC and participating in 
the eommittee activities. Both Presidents Cartel- and Ford recog- 
nized the contributions of ANMC. I speak as a staff member of the 
American National Metric Council, but ANMC is much larger. ANMC 
is the sector members, corporations, individuals and others involved 
with all of our activities. 



337 



Let me speak to certain specific sectors of the economy. The Food 
and Grocery Products area is a vital link to the consumer as we move 
towards metrication. Our organization has recently broken down into 
a number of additional committees which directly involve such items 
as dairy products, meats, food services, shelf stable foods, frozen foods 
and others. But in moving to metrication, we also have additional prob- 
lems or situations that have arisen over history. Issues, such as stand- 
ardized package sizes, reduction of the proliferation of sizes, and 
others are involved with the change to metrication. Have you ever won- 
dered why hot dogs come in packages of 10, while hot dog rolls come 
in packages of eight? Have you ever wondered why the standardized 
package for tuna is 6% ounces. These and other practices must be con- 
sidered as we move towards hard metric conversion. These are not 
strictly metric questions but are questions that must be answered for 
the benefit of the American consumer in this overall transition. 

Currently, metric size soft drink bottles are being sold by the fol- 
lowing companies : 7— Up, who was first with the liter, along with Coca 
Cola. Pepsi Cola, Shasta, and Dr. Pepper. The Bureau of Alcohol, 
Tobacco, and Firearms lias mandated metric sizes for wines and liquors 
with a 1979 and 1980 cut off date for these products respectively. So 
your drink in 1980 of 7 & 7 w T ill be a metric size drink as will many 
others. Conversion of other food products will be somewhat slower 
tli an these items. 

The textile and apparel industries are also moving ahead toward 
metrication. A number of manufacturers in the apparel industry are 
dual labeling their products at this time. Burlington Industries and 
Simplicity Patterns are examples of companies moving toward metri- 
cation. One of the major problems involved with conversion for the 
apparel industry is the critical issue of sizing. Fortunately or un- 
fortunately, depending on your perspective, the human body is chang- 
ing. We are becoming wider in certain areas and smaller in others. The 
problem of misfit and improper fit in clothing is growing. Before a 
hard conversion to metric sizes, research of the human body which will 
redefine the sizing patterns for American industry is required. Prior 
to this work, it is encouraged that dual labeling continues. A size 8 
dress is merely the nomenclature to describe a product. It does not 
mean 8 units of anything. Whereas in men's clothing a size 40 jacket 
reflects a measurement sensitive product. The women of America 
should welcome metrication and the eventual reduction in the num- 
ber of sizes and rationalization of product lines. This is another exam- 
ple of change, not for change sake alone. Metric conversion in cloth- 
ing, especially in women's clothing, would reflect a benefit ultimately 
to the consumer. 

The metric system has already made inroads into our lives in many 
ways. The role of film we have for our 35 mm camera, the 100 mm cig- 
arette that you smoke which may or may not be a silly mm longer. The 
electricity that we use is measured in a metric unit. The Olympics 
and their events are in metric units. Educators in many ways have 
been leading America towards metrication. Virtually every State has 
incorporated some metric program into their curriculum. 

Recently the ANMC Educational Materials Committee developed 
a practical guide for metric usage in educational materials. The "Met- 



338 



ric Guide for Educational Materials" was developed with the coopera- 
tion of over 20 publishing companies in attempts to reduce the confu- 
sion over the usage of metric units in these materials. Personally. I feel 
that those who continue to fuel the debates concerning the spelling and 
use n f symbols may create only greater confusion as we move toward 
metrication — the "er vs. re" usage is only a minor problem and should 
not cloud the overall picture of metrication. 

Employee training is another crucial area which involves the in- 
dustrial and commercial educators. Many companies already involved 
in metric conversion have developed training programs based on their 
specific needs and goals. Their experiences indicate that whether a 
company has 5 employees or 500. the following considerations apply : 

1. A need for management commitment to a single set of metric 
training objectives. In the absence of objectives, success or failure of a 
program becomes a subjective judgment ; 

2. Organizations must determine specific need? teaching what each 
person needs to know for his or her job ; and 

8. Everyone must use proper training techniques. They must tailor 
their training methods to the job to be accomplished. Determining 
whether self -instruction, slide tape presentations or other methods will 
best fit their unique situations. 

The Metric Conversion Act makes no specific financial assistance 
plans available for business, industry, or individuals. The only pro- 
gram to date which has developed financial programs has been the 
U.S. Office of Education. The 3-year, $10 million program USOE ad- 
ministers, has assisted State, local and nonprofit organizations in the 
development cf metric programs. Subsidies to help defray conver- 
sion, which will be minimal, are not provided for within the act. One 
of the major misconceptions is that this bill was passed for the benefit 
of business and industry and that the American public will have to 
fend for itself during the changeover. 

This is totally incorrect. The act provides for the U.S. Metric Board 
to "assist the public through information and education programs to 
become familiar with the meaning and applicability of metric terms 
and measures in daily life.'* This, of course, is a very general state- 
ment but the act does specify the Board's activities in this area will 
include the use of electronic and print media, talks before citizens 
groups, and trade and public organizations, consultation by Govern- 
ment with national. State and local education associations and institu- 
tions to insure that metric is included in school curriculums and the 
teachers are properly prepared. 

The U.S. Metric Board and the American National Metric Council 
will work jointly toward a common goal — that being the voluntary, 
orderly, efficient and logical conversion of America to the metric gys- 
tem. Conversion should evolve rather than become a revolution. 
Peaceful change and gradual change is much more accepted than some 
quick and regulated change. 

A number of State and local governments have established their 
own metric boards to monitor and assist local governments in plan- 
ning metric conversion in areas other than education which have al- 
ready been covered. Interestingly enough, format Gov. James Carter 
of Georgia was one of the first to work with a State Metric Conversion 
Board. President Cartel', who does have a somewhat technical back- 



339 



ground, has endorsed the Metric Conversion Act of 1975 and promised 
that it will be implemented. 

During conversion, the objective should be to get through the tran- 
sition period as quickly as possible with a minimum of problems, mis- 
understandings and expense. To achieve this objective, certain things 
will be required. A well-coordinated education effort over a short con- 
centrated period of time directed particularly to and involving the 
adult population stressing point of use and point of scale comparison 
information. 

Spending great time on mathematical calculations to convert from 
the customary to the metric system would be most futile. Special at- 
tention should be paid to low-income and foreign language groups, 
not because of their informational needs but to insure that they under- 
stand and are able to use metric information. 

For the elderly, no special programs are needed. Experience has 
proven in England that senior citizens understand and are able to use 
the metric system just as quickly as their juniors. The only special re- 
quirement they found was that that you should use large type on 
pamphlets. 

Sources of reliable metric information in programs of assistance 
need good publicity, so that people know where to get accurate infor- 
mation. There is now, and probably will continue to be, a small amount 
of erroneous or misleading information and gimmickery available 
that may confuse people. Some means of identifying what is approved 
and correct may be needed, perhaps a symbol as used in Canada. The 
U.S. Metric Board may decide to approve or disapprove in this 
manner. 

Introduction of the Universal Product Code (UPC) had its set- 
backs in the supermarket because consumers were not involved in the 
planning process. To avoid similar problems, metrication will need 
consumer involvement and support. 

It is a great honor for me to be involved with a program that will 
affect every American in some way or another. The challenge is great 
but the work lies ahead for all of us. Will metrication be a costly and 
disruptive exercise ? The answer lies only with us. Through a coopera- 
tive effort we can manage the changeover to our national advantage. 
The American National" Metric Council is dedicated to this goal. We 
look forward to meeting our responsibility of planning and coordina- 
ting metrication with the support of the U.S. Metric Board. As we 
look back on the progress of metrication of the past years, we can 
take pride in the strides that have been made. But the road ahead is 
long, and must be organized and well planned in all aspects. Walter 
Cronkite, in a recent editorial, noted that metric conversion should 
be measured in centimeters per year rather than miles per hour. We 
have covered more ground than many people realize, but we still 
have a very long way to go. Cronkite continued, 

... failure to change from inches to centimeters and from 
quarts to liters means not to trade abroad or to do so at a 
competitive disadvantage. Learning an entirely new system 
of measures may be difficult for most of us, but it can be done. 

President Ford, on the occasion of signing the Metric Conversion 
Act of 1975, noted that we cannot become an island in a metric sea. 



CLOTHING AND TEXTILES: SUPPLIES, PRICES, AND 
OUTLOOK FOR 1978 

(By Annette Polyzou, Home Economist, Agricultural Research Service, USDA) 



Between 1960 and 1977 consumer spending on clothing increased (in 
both current and constant dollars) due mainly to rising real disposable 
income and to increased concentration of the population in the age 
group that typically has the highest clothing expenditures. The spend- 
ing for clothing, however, did not increase as much as the spending 
for some other items — chiefly durable goods and services. As a result, 
the percent of total expenditures spent on clothing declined during the 
period, while the percent spent for durables such as automobiles, hous- 
ing, and furnishings increased. The shift in expenditures might be 
attributed to an increase in the number of households in the popula- 
tion and a resultant increase in demand for housing and household 
furnishings. During 1977 consumer spending continued to reflect the 
trend toward durables, and might reflect some consumer resistance 
toward the increases in the prices of apparel. Those increased prices 
mainly reflected increased costs for natural fibers such as cotton, wool, 
silk, and cashmere. During 1977 prices of cotton and wool were high 
in relation to the prices of manmade fibers, so textile mills produced 
natural-looking fabrics that contained high percents of synthetic 
fibers. 

TRENDS IN CLOTHING EXPENDITURES AND PRICES: 19G0-19 77 1 

Two types of data can be used in examining clothing expenditures : 
(1) Aggregate data on personal consumption expenditures (POE) 
are supplied annually by the Bureau of Economic Analysis of the U.S. 
Department of Commerce. These data, which are derived from business 
transactions, measure total expenditures in the United States and are 
part of the U.S. National Income and Product accounts. The PCE 
data are easiest to use when they are expressed on a per capita basis 
(total U.S. expenditures divided by total U.S. population). (2) House- 
hold data on family expenditures are collected through nationwide sur- 
veys, such as the Consumer Expenditure Surveys (CES) of 1960-61 
and 1972-73, conducted by the Bureau of Labor Statistics of the De- 
partment of Labor and the U.S. Department of Agriculture. CES data 
measure average family expenditures and are available for component 
population groups as well as for national totals. These data, however, 
have only been available at about 10-year intervals. 



1 Preliminary figures for 1977 — based on most recent data available during October 1977. 

(340) 



341 



The two types of data are not interchangeable. 2 The PCE data are 
most useful in examining trends in clothing expenditures and the CES 
data are most useful in developing budgets or in helping families 
understand their expenditures. 

Nevertheless, examination of the data from both sources, between 
1960 and 1977, shows similar patterns with respect to (1) total expendi- 
tures for clothing and (2) the percent of total expenditures spent on 
clothing. 

Expenditures. — Per capita expenditures for clothing and shoes, as 
measured by PCE data, increased both in current and constant dollars 
during the period 1960-77 (table 1). In current dollars, per capita 
expenditures for clothing and shoes were about 152 percent higher in 
1977 than in 1960. Approximately two-thirds of this increase was 
caused by a rise in the level of prices and one-third by increased buy- 
ing — a real increase of 51 percent in dollars of constant value. Such 
an increase in purchase of clothing and shoes during this period might 
be attributed to rising incomes as well as to a change in the composition 
of the population. Real disposable income was 89 percent higher in 
1977 than in 1960, according to the Department of Commerce series on 
personal income and outlay. The composition of the population during 
those years reveals an increasing proportion of individuals in the 14-34 
age group (table 2) . Those individuals typically have the highest cloth- 
ing expenditures that result from new clothing needs associated with 
sporting activities, dating, entering college, or beginning careers (1). 
Individuals in that age group also tend to be more fashion conscious 
than individuals in other age groups and may thus accept fashion 
changes more quickly. The increase in 14-34 year olds was partially 
offset by a slight increase in the proportion of individuals age 55-65 
plus. They typically spend less on clothing than other individuals due 
to the decreases in clothing needs and income, which result from retire- 
ment from the labor force, and to a reduced level of physical activity. 
Projections of the population for 1980 indicate that the composition 
will be virtually the same as that for 1976— the greatest proportion of 
the population will be individuals with the highest clothing expendi- 
tures. Thus, real increases in per capita clothing expenditures, on an 
aggregate basis, are likely to continue at their present levels during the 
next few years and perhaps to increase as real disposable personal in- 
comes rise ; however, future increases are likely to be at a slower rate 
since projections indicate no further growth in the 14-34 age group. 

As measured by the CES data, average family expenditures on cloth- 
ing, materials, and services, including all laundry and ^dry cleaning 
services, were 17 percent higher in current dollars in 1972-73 than m 
1960-61 (table 3). In constant dollars, however, average family ex- 
penditures dropped by about 13 percent between 1960-61 and 1972-73. 
That drop might be attributed to a decline in family size. The data 
collected separately by CES and by the Bureaus of the Census show a 
decline in average family size between 1960 and 1970. Smaller families 
generally buy fewer clothes. Data from the Bureau of the Census shows 
that averagef amilv size continued to decline during the period 19 J 2- S 6 
through March 1977 from 3.51 persons to 3.37 persons. That decline 

* For a more detailed discussion of the differences in aggregate and household data, 
see Family Economics Review, December 1970. 



342 



suggests the possibility that family expenditures on clothing may have 
continued to decline in recent years. 

Percent of total spending for clothing. — In both current and con- 
stant dollars, the percent of total personal consumption expenditures 
(PCE) spent on clothing and shoes declined during the period 1960- 
77. In current dollars, clothing comprised 8.2 percent of personal 
consumption expenditures in 1960 and 6.8 percent in 1977. In constant 
dollars, clothing comprised 8.1 percent of personal consumption ex- 
penditures in 1960 and 7.7 percent in 1977. Clothing, as a percent of 
total personal consumption expenditures, declined at a faster rate in 
current than in constant dollars because prices for all items of per- 
sonal consumption expenditures increased at a faster rate than prices 
for clothing. 

The CES data are consistent with PEC indications of a decline in 
clothing expenditures as a percent of total personal consumption ex- 
penditures. Clothing expenditures as a percent of total consumption 
expenditures — were lower in 1972-73 than in 1960-61 in both current 
(7.8 percent versus 10.9 percent) and constant dollars (7.8 percent 
versus 10.2 percent) . 

The downward trend in clothing as a percent of total expenditures 
parallels a downward trend for nondurables in general. Expenditures 
have shifted away from nondurable goods toward durable goods such 
as automobiles, furniture, and household equipment, and services such 
as housing, household operation, and transportation. According to 
the PCE data, nondurables declined from 46 percent of personal con- 
sumption expenditures in 1960 in constant dollars to 39 percent in 
1077. whereas durables rose from 12 to 16 percent and services rose 
from 42 to 45 percent during the same period. The CES data show a 
similar trend toward the purchase of durables and services at the ex- 
pense of nondurables. The trend toward durables may be partially 
attributed to an increased rate of new household formation, during the 
1960-77 period, resulting from a greater proportion of individuals 
aged 14-34 who either live away from home before marriage or get 
married and form new households. The formation of new households 
is typically associated with increased demand for durable goods and 
services, such as automobiles, housing, and household furnishings. 

Attitudes toward clothing also have changed in recent years. Most 
individuals have adopted a casual lifestyle that has brought about a 
relaxed attitude toward clothing (2, 4). Jeans have become a major 
influence on apparel as have separates that provide variety through 
mixing and matching garments and allow inexpensive replacement 
of components. There has also been greater use of active sportswear, 
such as jogging suits, as streetwear. Consumers' interest has nlso 
shifted in recent years from faddish items to garments with basic 
utility and permanence. Trade sources expect consumers to purchase 
a few higher-priced, better-quality garments with more durability for 
long-lasting wear rather than many lower-quality faddish items. 

Clothing expenditures and prices during J '077 

Consumer expenditures for clothing and shoes averaged $373 l )(>i> 
i 'i r on durinu' Che first three quarters of 1977, according to preliminary 
figures (table 1 ). Although that amount is $18 higher than the corre- 



343 



sponding amount m 1976, nearly two-thirds of the increase resulted 
from a rise in the level of prices rather than from increased buvino- 

The price level for apparel and upkeep, as measured by the Con 
sumer Price Index (CP1) , averaged 4,6 percent higher durino- the first 
three quarters of 1977 than during the same period in 1976 (table 4) 
Increases among the three apparel subgroups averaged 4.6 percent for 
men's and boys : clothing, 3.3 percent for women's and girls' clothino- 
4.9 percent for footwear, and 5.2 percent for other apparel commodi- 
ties. Such increases for apparel items were less than the 6.4 percent 
increase for all items of the CPI. 

Retail sales of apparel were generally weak during the first quarter 
of 1977. Abnormally cold weather during January and early February 
caused an increase in home-heating fuel usage as well as a rise in fuel 
prices and in weather-affected food prices, thus reducing con- 
sumers' discretionary income for retail purchases. The severe cold did 
strengthen sales of sweaters, thermal underwear, hats, and gloves. As 
the eli'ects of the severe weather abated and personal income increased 
substantially during the latter half of the first quarter, consumer 
spending rapidly increased. Strong sales of durables, mainly auto- 
mobiles, major appliances, and furniture, indicated that consumers 
may have purchased such big-ticket items in anticipation of future 
price increases resulting from the rise in fuel prices. Consumers also 
invested in home improvements, such as storm windows and home in- 
sulation, presumably to reduce energy usage. 

The durables trend continued to be strong during the second quar- 
ter and affected sales of automobiles, appliances, garden and nursery 
equipment, sporting goods, and related items. Various trade sources 
cited several possible reasons for the weak apparel sales during most 
of the second quarter : 

— consumers' resistance to higher prices of apparel, 

— consumers' strong interest in housing and automobiles, 

— consumers' concern about energy and long-term inflation. 

Retailers responded to sluggish apparel sales by promoting aggres- 
sively and cutting prices in hope of creating some consumer interest. 
Retailers also kept inventories lean and depended on quick delivery of 
fast-moving items. Unseasonably warm weather during May created 
strong consumer demand for active sportswear and athletic footwear 
for all family members. Other factors that influenced the growth of 
active sportswear during this period included increased use of such 
sportswear as streetwear, increased attention on physical fitness and 
continued emphasis on sports activities as social affairs. 

The sales pattern of the third quarter again favored durables (espe- 
cially automobiles) over softgoods although apparel sales strengthened 
somewhat during this period. Consumers responded well to clearance 
prices on summer items and back-to-school merchandise early m the 
quarter. Retailers realized that consumers had been increasingly more 
price conscious throughout the year. Thus, they stressed price oyer 
fashion during the back-to-school* season and offered basic merchandise 
such as corduroy and denim jeans, knit tops, flannel shirts, Shetland 
pullovers, and down jackets and vests at competitive prices. Accord- 
in o- to several trade sources, prices for most fall apparel items for men 



344 



and women were 5 to 15 percent higher than a year ago. Higher prices 
of fall apparel mainly reflected increased costs for such natural fibers 
as cotton, wool, silk, and cashmere as well as increased yardage for 
the fuller fashions for women — tiered and double skirts, full dresses, 
and big blousons. Consumers did not seem adverse to spending extra 
money for better quality apparel which suggested that they may be 
viewing the purchase of apparel as an investment. Retailers cited some 
price resistance toward lower and moderate-priced apparel during the 
fall season, and responded with aggressive advertising and promotion 
and tight control of inventories. 

The seasonally adjusted wholesale price index for apparel rose 0.7 
percent during the period June through September. This indicates 
the probability of price increases for apparel at the retail level during 
the months ahead. 

With higher prices of apparel, consumers may wish to take advan- 
tage of this year's fashion emphasis on separates and create ensembles 
from jackets, vests, sweaters, shirts, pants, and skirts coordinated by 
color and/or fabrication. Consumers can also stretch their clothing 
dollar by utilizing the separates concept to build on last year's ward- 
robe. Also, with the onset of cold weather, consumers can use apparel 
as an insulation against the cold and as an aid in saving fuel costs by 
layering garments and wearing sweaters. 

CONSUMPTION AND PRICES OF FIBERS DURING 197 7 

U.S. per capita mill use of natural fibers was lower this year than 
last, while mill use of manmade fibers w T as higher. Estimated U.S. per 
capita mill use of all fibers in 1977 (based on data for the first 
months) is about 55.6 pounds, including 14.5 pounds of cotton. 0.5 
pounds of wool, and 40.5 pounds of manmade fibers. This compares 
with 1976 per capita use of 54 pounds, including 15.9 pounds of cotton. 
€.6 pound of wool, and 37.6 pounds of manmade fibers. The natural 
look in clothing has continued to be important during the year, but 
high prices of cotton and wool, relative to prices of manmade staple 
fibers, have influenced textile mills to achieve natural looks with 
blended fabrics containing a higher percent of synthetic fiber. This 
is apparent in the denim market where mills are offering denims in 
80/20 and 65/35 cotton/polyester blends. Blends now account for 
nearly 30 percent of the denim market. Even corduroy, which has 
traditionally been all-cotton, is being offered in blends of 84 percent 
cotton and 16 percent polyester and of 50/50 cotton/polyester. Other 
natural-looking fabric blends available in the market for men's and 
women's clothing include polyester blended with wool, silk, linen, 
viscose rayon, and acrylic, as well as acrylic blended with wool. Ee- 
search in the area of textiles is focusing on the development of easy- 
care synthetic fabrics with a natural hand. Texfi Industries 3 recently 
introduced such a synthetic fabric — a lightweight all-polyester fabric 



• Reference to a company name is used in this publication solely for the purpose of 
providing specific information. Mention of a company name does not constitute a guar- 
antee or warranty Of the company by the U.S. Department of Agriculture or an endorse- 
ment by the Department over other companies not mentioned. 



345 



coated with a finish to allow moisture absorption. Another recent de- 
velopment, air texturizing, fluffs up acrylic yarn to impart a mohair- 
like appearance to the fiber. 

U.S. mill consumption of cotton for the first 9 months of 1977 was 
about 9 percent lower than during the same period in 1976. Mill use 
of manmade staple fibers gained about 8 percent over 1976. The decline 
in mill consumption of cotton was attributed to the rather static textile 
activity and relatively high cotton prices in relation to manmade 
staple fiber prices. 

Mill-delivered cotton prices have declined from a high of 83 cents 
per pound in March to 57 cents in September. This is about the same 
price that mills are presently paying for manmade staple fiber. The 
decline in cotton prices during this period was mainly due to prospec- 
tive abundant supplies of cotton in relation to weakening demand. 
The 1977 cotton crop is about a fourth larger than last year's crop due 
to increased cotton acreage and favorable growing conditions during 
the summer. Diminished domestic demand for cotton is reflected in 
the decline in mill consumption of cotton as previously mentioned. 
Foreign demand for cotton has also weakened. Exports of cotton 
during the 1977-78 marketing year are expected to total slightly below 
last season's 4.8 million bales. However, currently lower cotton prices 
are expected to stimulate U.S. mill consumption of cotton in 1978 and 
may reverse the trend toward cotton/polyester blends in the denim 
market. 

Mill consumption of raw apparel wool during the first 8 months of 
1977 was about 12 percent lower than during the same period in 1970, 
reflecting a shift to higher synthetic fiber content in blends due to 
high wool prices. Average U.S. farm prices for wool have declined 
from a high of about 75 cents per pound in January to 71 cents in 
September, but are still above 1976 wool prices. 

Shipments of manmade fibers by U.S. producers during the first 
8 months of 1977 were approximately 11 percent higher than in the 
same period in 1976, according to Textile Organon (September 1977). 
According to fiber producers, price increases during the year for 
selected acrylic, rayon, nylon, acetate, and polyester fibers mainly 
reflected increased costs of energy, raw materials, and labor. Currently, 
acrylic is benefiting from strong fall/holiday sweater sales, nylon is 
benefiting from strong sales of down-proof nylon parkas, and ski wear 
and other sports outerwear, and polyester is benefiting from a revived 
interest in polyester/rayon slacks as well as a shift in production from 
all-cotton to cotton/polyester denims. 

REFERENCES 

1. Erickson, Ann. 196S. Clothing the urban American family: how much for 
whom? Monthly Labor Review, BLS Report No. 238-21G, pp. 14-19. 

2. Selected articles from the Daily News Record, The New York Times. The 
Wall Street Journal and The Washington Post. 

3. U.S. Department of Agriculture, Economics and Statistics Service. 19. «. 
Cotton and Wool, Situation. CWS-4 and OWS-7. 

4. U.S. Department of Commerce. 1977. Recreation and business, the American 
connection. Commerce America, Sept. 12 issue, pp. 7-10. 



346 



5. U.S. Department of Commerce, Bureau of the Census. 1977. Population 
characteristics, households and families by type: September 1977. Current Popu- 
lation Reports, Series P-20, No. 2S2 (table 3) ; and personal communication with 
the Bureau of the Census. 

6. . 1977. Population estimates and projections, estimates of the popula- 
tion of the United States and components of change: 1940 to 1976. Current Popu- 
lation Reports, Series P-25, No. 706 (table c) . 

7. . 1977. Population estimates and projections, projections of the popu- 
lation of the United States: 1977-2050. Current Population Reports, Series P-25, 
No. 704 (table h). 

8. , Bureau of Economic Analysis. Survey of Current Business ( tables 2.8 

and 2.4) 1976, 56(1), parts I and II and 1977, 57(7) ; and personal communica- 
tion with the Bureau of Economic Analysis. 

9. U.S. Department of Labor, Bureau of Labor Statistics. 1977. Changes in 
consumer spending patterns. News, USDL : 77-42S, pp. 1-5. 

10. . 1966. Consumer expenditures and income total — United States, 

urban, and rural. 1960-61. BLS Report No. 237— Supplement 3, Part A, p. 2. 

11. . 1976. Consumer expenditure survey series : diary survey, July 1973- 

June 1974. Report 448-3. p. 11. 

12. Whitehead, Charles A. (Ed.). 1976. Textile Organon. New York: Textile 
Economics Bureau, Inc. XLVIII(9). 



TABLE I. — ANNUAL EXPENDITURES ON CLOTHING' AND SHOES 1 



Per capita Percent of expenditures for Aggregate expenditures 
expenditures 2 personal consumption ■ 













Billions of 






Constant 




Constant 




constant 


Billions of 




dollars 


Current 


dollars 


Current 


dollars 


current 


Years 


(1972) 


dollars 


(1972) 


dollars 


(1972) 


dollars 


1960 


203 


148 


8. 1 


8.2 


36.6 


26.7 


1961. 


203 


149 


8.1 


8.2 


37.3 


27.4 


1962.. 


209 


154 


8.1 


8.1 


28.9 


28.7 


1963 


209 


156 


7.9 


7.9 


39.6 


29.5 


1964 


222 


166 


8.1 


8.0 


42.6 


31.9 


1965 


227 


172 


7.9 


7.8 


44.2 


33.5 


1966 . 


239 


186 


8.0 


7.9 


46.9 


36.6 


1967... 


236 


192 


7.8 


7.8 


46.9 


38.2 


1968 


242 


208 


7.7 


7.8 


48.6 


41.8 


1969... 


245 


223 


7.6 


7.8 


49.6 


45.1 


1970 


240 


227 


7.4 


7.5 


49.2 


46.6 


1971 


249 


244 


7.5 


7.6 


51.6 


50.5 


1972. 


264 


264 


7.5 


7.5 


55.1 


55.1 


1973 


281 


291 


7.7 


7.6 


59.2 


61.3 


1974. _ 


279 


308 


7.8 


7.3 


59.1 


65.3 


1975.... 


288 


329 


7.9 


7.2 


61.5 


70.2 


1976. 


301 


355 


7.9 


7.0 


64.7 


76.3 


1077 3.., 


306 


373 


7.7 


6.8 


66.2 


80.9 



1 Data shown for 1960 through 1976 differ from data given in previous papers on the outlook for clothing and textiles. 
The revisions resulted from changes in definitions of personal consumption expenditures (other than clothing and shoes) 
statistical revisions of previous estimates, and revisions in population figures for 1975 and 1975. More detailed information 
can be obtained from the Survey of Current Business and Current Population Reports (see sources below). 

2 Calculated by dividing aggregate expenditures for each year by population figures for July 1 of each year. 

3 Preliminary figures— average of estimates for 1st 3 quarters of 1977 (i.e., seasonally adjusted quarterly totals at annual 
rates). 

Sources: U.S. Department of Commerce, Bureau of the Census, 1977, Population Estimates and Projections, Current 
Population Reports, series P-25, No. 706 (table c). U.S. Department of Corrrrerce, Bureau of Economic Analysis, Survey 
of Current Business (tables 2.3 and 2.4), 1976, 56(1), pts. I and II, and 1977 57(7): and personal communication with the 
Bureau of Economic Analysis. 



347 



TABLE 2.— COMPOSITION OF POPULATION BY AGE 



Total Percent of population by age 

population — 

Year (thousands) Under 14 14 to 34 35 to 54 55 to 65 plus 

1960 180,671 30 28 25 13 

1970 204,878 26 32 23 19 

1976 215,118 22 36 22 20 

19801 224,066 21 36 22 21 

1 Projections. 

Source: U.S. Department cf Commerce, Bureau of the Census, "Current Population Reports, PoDulation Estimates and 
Projections," series P-25, No. 704, July 1977, Projections of the Population of the United States;' 1977 to 2050, table H. 



TABLE 3— COMPARISON OF 1960-61 AND 1972-73 CES DATA i 

Item 1960-61 1972-73 
Current dollars: 

Average total consumption expenditures 5,054 8,282 

Average expenditures on clothing, materials and services 553 647 

Clothing expenditures as a percent of total consumption expenditures 10. 9 7. 8 

Average family size 3.2 2.9 

Constant 1972 dollars: 

Average total consumption expenditures 7, 328 8, 282 

Average expenditures on clothing, materials, and services 747 647 

Clothing expenditures as a percent of total consumption expenditures 10. 2 7. 3 

1 1972-73 preliminary data. 

Source: U.S. Department of Labor, Bureau of Labor Statistics, 1977, Changes in consumer spending patterns, News, 
USDL: 77-428, pp. 1-5. 



TABLE 4.— ANNUAL PERCENTAGE CHANGE IN SELECTED INDEXES OF CONSUMER PRICES 
Consumer Price Index 1973 1974 1975 1976 1977 " 

All items +6.2 +11.0 +9.1 +5.8 +6.4 



Apparel and upkeep 2 +3.7 +7.4 +4.5 +3.7 +4.6 

Men's and boys' clothing +3.7 +7.9 +4.3 +3.5 +4.6 

Women's and girls' clothing +3.5 +6.0 +2.4 +2.8 +3.3 

Footwear +4.2 +6.1 +4.4 +4.0 +4.9 

Other apparel commodities 3 +5.2 

1 Preliminary estimates— average for 1st 3 quarters of 1977 compared with the average for 1st 3 quarters of 1976. 
J Also includes infants' wear, sewing materials, jewelry, and apparel upkeep services, for which indexes are not available. 
3 Developed in 1976 to include diapers, yard goods, earrings, wrist watches, and zippers. 

Source: U.S. De, artment of Labor, Bureau of Labor Statistics, 1977, News, Consumer Price Index (monthly issues); 
and personal communication with the Bureau of Labor Statistics. 



98-72' 



ENERGY EXTENSION SERVICE 

(By Judith M. Lierseh, 1 Director, Energy Extension Service, DOE) 



The Energy Extension Service (EES) is presently operating as a 
pilot program in 10 States. As a pilot program, it provides a promis- 
ing experiment in energy outreach which can be used to develop a 
rational and effective nationwide program. 

BACKGROUND 

The enabling legislation for the Energy Extension Service is title V 
of the Energy Research and Development Administration's (ERDA) 
fiscal year 1078 authorization bill (P.L. 05-39) which was signed into 
law June 3, 1077. A review of the legislation indicates the following 
points of congressional concern and intent : 
— The bill's sponsors were concerned that creating general aware- 
ness of the energy problem would not be enough. Individuals need 
the knowledge and capability to use conservation and alternative 
energy technologies on a specified basis, as well as to understand 
the energy problem. 
— Current Federal energy outreach efforts were viewed as piecemeal 

approaches without coordination and overall planning. 
— The underlying philosophy is to create an outreach approach, 
heavily dependent on State participation, as an effective way to 
ensure individual capability to adopt suitable energy saving tech- 
niques and technologies. 
The concept of direct assistance to consumers inherent in EES stems 
from the Cooperative Extension Service (CES) model where CES 
acts as a major force and catalyst for widespread change at the local 
level. The record shows many references to the congressional intent 
that the EES follow the CES model to provide grass-roots delivery 
of relevant information and assistance and the follow through to be 
sure this is timely, on target and thoroughly understood. 

A major departure from the CES model is that there is no single 
equivalent to the land grant college system in energy to administer 
and provide technical support to EES. Rather, in EES the State gov- 
ernment- administers the program and the technical J>ase is under- 
stood to exist in different institutions in each State, including the 
land grant institutions. ERDA was selected to implement the EES 
since ERDA was close to this technical base which is critical to the 
program success. With the reorganization of the energy agencies, the 
Department of Energy is assuming the role of managing the EES. 

1 ' s expressed In thla papor are those of the author and not necessarily those 

of tho T'SDA. 

(348) 



349 



PURPOSE AND OBJECTIVES 

The major purpose and the bottom line of the EES is to increase 
energy savings and the substitution of renewable for nonrenewable 
fuels. This is to be accomplished by providing small energy consumers 
with an accessible, reliable and creditable source of assistance. 

Small consumers specifically targeted b}- EES include individuals, 
small institutions and business establishments and local governments. 
History has shown that these are the least well prepared energy users 
for coping with current energy problems. EES aims particularly to 
teach small users to be better able to cope with rising energy prices 
and potential fuel shortages. 

Finally, it is assumed that EES target audiences, in the course of 
receiving extension services, will report on the institutional and other 
barriers perceived to be preventing adoption of the energy saving 
measures being promoted. EES cannot necessarily overcome these bar- 
riers, but can initiate a systematic process for collecting such informa- 
tion and transmitting it for follow-up action to public and private 
organizations at Federal and State levels. Thus, an opportunity is 
created for regulators, legislators, administrators, and technology 
developers to take action to overcome some of the barriers impeding 
use of energy saving methods and equipment. 

PROGRAM HIGHLIGHTS 

One of the major program highlights is face-to-face assistance to 
small energ}- consumers. In addition to this emphasis on personalized 
assistance, another special aspect of EES is the State role in planning 
and operating the program. We are committed to the philosophy that 
States must have the flexibility to design program measures which are 
suited to their particular energy circumstances. 

In the area of technical assistance, DOE /EES operates as a " whole- 
saler*' and one which must be very responsive in efficiently supplying 
the States with technical information and training assistance they 
specifically require. The DOE/EES technical assistance team is work- 
ing with the pilot States to identify their specific needs and to provide 
service characterized by quick turnaround on technical questions. Fur- 
ther action involves finding public and private information resources 
for the Sta L es. then facilitating contact. The overriding aim is to build 
technical capability within the States and an ability to benefit from 
the resources already available. 

A recurring theme throughout the development of the program is 
not to "reinvent the wheel/' DOE/EES encourages the States to de- 
sign their programs to tie directly into and supplement existing pro- 
grams and service mechanisms wherever possible thus enabling States 
to achieve a multiplier effect by tapping into the best services available 
throughout the State. 

To maximize the benefit of lessons learned, we have given the 
nonpilot States a head start in developing an energy outrearh pro- 
gram. Each nonpilot State has access to a small grant to be used to 
track the pilot program. In addition, the pilot States have each budg- 
eted a half-man vear of effort for information sharing with the non- 
pilot States. DOE/EES also makes available to these States activities 



350 



such as a recently held technical information short course held at the 
DOE Technical Information Center in Oak fiidge, Tennessee. 

PILOT TEST FEATURES 

There are a number of special approaches with which DOE /EES is 
experimenting in the pilot program and which may have broader 
application. 

— DOE/EES is pursuing a simple and economic evaluation to deter- 
mine the overall implementation approach, and specifically, what 
works best, what doesn't and why. The basic elements to the evalu- 
ation are a rigorous evaluation design coupled with systematic 
data collection and monthly interviews with State personnel as- 
sociated -with the EES programs. In the 18 months of operation of 
the pilot program, it is probably not possible to achieve definitive 
answers but trends will emerge to guide any future efforts. 

— The pilot program is set up to test the interaction between DOE/ 
EES program management in the field and in Washington head- 
quarters and to work out a viable communications system between 
field and headquarters. One of the three State program officers 
working with DOE/EES is located in Denver and works with 
three Western/Southwestern States. Clearly a national program 
will call for a significant role for DOE/EES personnel located in 
offices in the field. 

— In order to facilitate and encourage information sharing among 
the pilot States, and between the States and DOE/EES, an in- 
formal Pilot State Council is being set up. One of the major roles 
of the Council will be to recommend to DOE the activities to be 
funded by a special projects fund. This is a $700,000 reserve de- 
signed to enable the States to undertake projects to meet needs 
which were not anticipated at the time the proposals were sub- 
mitted in July, projects which benefit two or more States, or 
generally, more innovative high risk projects which may be ex- 
perimental in design. 

— The pilot program will give DOE an opportunity to test the con- 
cepts and approach to collecting barrier information and feeding 
this back to decisionmakers in a position to take action on the bar- 
riers preventing adoption of energy techniques and technologies. 

PILOT PROGRAM UPDATE 

The 10 pilot States were selected competitively in August 1977 from 
among 50 proposals received by ERD A/DOE for the Energy Exten- 
sion Service. The proposals were selected on technical merit and to 
represent a mix of program and management approaches as well as a 
broad geographic representation. Grants were awarded in September 
to each State for $1.1 million for the 19-month pilot period. 

The 10 pilot States are: Alabama, Connecticut, Michigan. Xew 
Mexico, Pennsylvania, Tennessee, Texas, Washington, Wisconsin, and 
Wyoming. 

The States are currently preparing detailed implementation plans to 
assure that resources are appropriately allocated to accomplish the 
activities in the State proposals. When the plans are completed at the 



351 



end of November they will provide a detailed basis for tracking the 
programs and for constructing effective evaluation models for each 
State. Some services will be offered in the pilot States by the end of 
the year. 

Several services are common to all the pilot States: energy audits, 
seminars, workshops and training, information dissemination to resi- 
dential dwellers, and energy hotlines. These services are targeted for 
residential consumers, small commercial establishments and public in- 
stitutions. Such commonality of services and target audiences should 
assist DOE/EES in drawing practical lessons which can assist energy 
extension services in different regions at such time as the program is 
expanded. 

Each pilot State, however proposes to expand on or initiate some 
service that is different from the others or approaches the service in 
some unique way. For instance : 

— 4 1 lahama will offer car care clinics 

— Connecticut plans consumer education on peak load pricing 
— Michigan's ESS will include vocational education in energy con- 
servation 

— Texas is preparing seminars for savings and loans officers to assist 
them in assessing energy conservation loan requests 

— Wyoming will offer home energy audits using para-professional> 

The implementation approaches by the pilot States are quite varied. 
In terms of management, five States will focus EES management on 
.the State government : three will use universities; and two have hybrid 
organizations combining both university and State government ele- 
ments. Some States, like Wyoming, plan to deliver services statewide. 
Others, like Washing-ton. are targeting narrowly defined geographic 
areas. All the States in one way or another use delivery support from 
sources other than the managing unit. For instance, seven States will 
provide services with assistance from the Cooperative Extension Serv- 
ice. In Pennsylvania, the EES will be aided by the well-established 
Pennsylvania Technical Assistance Program (PENNTAP). 

An interagency working group has been established to serve as a 
focus for providing DOE with comments on EES implementation 
and other information that might be of use to the pilot States. It is 
expected that the working group will become a vehicle for coordinat- 
ing Federal efforts to provide technical assistance to small energy 
consumers. Relations are being established with national associations 
and we are just beginning to coordinate our activities with the new 
program offices in DOE. 

DOE issued the announcement of grants to the nonpilot States 
on October 14 and responses are due in by December 9. All of the 
States and many of the territories have indicated that they intend 
to reply. Clearly, there is tremendous interest in this type of energy 
program in the States. 

Finally, we have two other activities underway which were required 
by the enabling legislation: the Comprehensive Plan and Program 
and the National Advisory Board. 

In response to congressional concern that the Federal Government 
coordinate its activities for developing energy information, education 
and outreach, EES and related Federal energy agencies are preparing 



352 



a comprehensive program and plan for beginning the process of plan- 
ning an integrated effort. The first report will describe the status and 
objectives of existing programs and some of the lessons learned by 
the various programs, some of which may have broader application. 
We hope that the report will stimulate further action for coordination 
among the programs when it is submitted to the President and 
Congress in December. 

DOE, which accounts for 45 percent of the energy outreach activ- 
ities undertaken by the Federal Government, is already in the process 
of consolidating its programs in response to the general philosophy 
inherent in the formation of DOE. In addition, the National Gover- 
nors' Association is undertaking an initiative to effect consolidation 
of the planning for energy programs sponsored under Federal grants. 
DOE has played an active role in legislative preparation and we 
anticipate introduction of the initiative in fiscal year 1978. 

A National Advisory Board required by the enabling legislation is 
still in the design stage. Early next year we will have a proposal on 
structure and functions of the Board ready for consideration. We 
expect that the Board, which will represent the concerns of the EES 
Target audiences will provide a useful arena for consideration of major 
EES policy decisions. 

This is a general overview of the development of the pilot EES 
and the possibilities for effective cooperation on all sides. Building 
on the example of the Cooperative Extension Service and working 
with USDA and others, we will help small energy consumers to cope 
with the potential dangers of our energy future, and we will assist 
the Nation in meeting the ambitious, but essential goals set forth in 
the President's Energy Plan. 



IX-HOME ENERGY MONITOR : A TEST OF CONSUMER 
RESPONSE TO ENERGY INFORMATION 



(By R. Bruce Hutton, 1 Ph. D., Program Manager, Consumer Motivation 

Branch, DOE) 



INTRODUCTION 

The Office of the Assistant Secretary for Conservation and Solar 
Applications, Division of Buildings and Community Systems, has 
responsibility for encouraging more efficient use of energy in the build- 
ings sector. To date, the majority of efforts of the Division have focused 
on technical product and system development. It is becoming more and 
more evident that consumer awareness as well as motivating the con- 
suming public, whether commercial or retail, is as important and 
difficult a change as developing the technologies. For example, there 
are many sound energy conserving products already available in the 
marketplace, such as insulation. Most have not achieved rapid and 
widespread use even though they can be justified in terms of a sound 
economic investment. In addition, there are many practices, such as 
reducing winter thermostat settings and/or increasing summer air- 
conditioning settings, that homeowners could adopt which would sub- 
stantially reduce their energy consumption. Clearly, these actions 
would be in both the individual and national interest, since they would 
conserve our supplies of fossil fuels and reduce the cost of energy to 
consumers. Yet, consumers have not widely adopted energy efficient 
practices or made more energy efficient purchase decisions. The Con- 
sumer Motivation Branch (CMB) is now conducting research on ways 
to work with the private sector to encourage residential consumers to 
(1) purchase more energy efficient products and (2) adopt more energy 
efficient practices. 

FEEDBACK 

A great deal of psychological research has suggested that giving 
immediate feedback to an individual about the effects of his actions 
enables him to better control his actions. The application of this idea to 
the reduction of energy consumption is clear. There is a general con- 
cern with homeowners about energy, and they are motivated by 
continually increasing energy costs and other pressures to reduce their 
home energy consumption. Consequently, if they are given rapid feed- 
back on their actual energy usage, especially in dollars and cents, this 
should enable them to better control their consumption. There are two 
main reasons why this effect might occur. First, since most homeowners 

J The views expressfnl in this paper are those of the author and not necessarily those 
of the USDA. 

(353) 



354 



are unaware of the amount of energy they use (the monthly utility bill 
is not clear or detailed enough to be very helpful), feedback provides 
information about energy use. Second, instant feedback indicates the 
success of various attempted conservation strategies which can lead the 
homeowner to discover and maintain conservation habits. 

Research funded by CMB and conducted by Princeton University 
has dealt directly with the feedback concept. (Full details of this pre- 
liminary research leading up to the current Energy Monitor Study are 
available in "Psychological Strategies to Reduce Energy Consump- 
tion: First Annual Report," Center for Environmental Studies, 
Princeton University, Princeton, New Jersey 80540). Four experi- 
ments were conducted. 

The objective of the first was to modify the rate of summer electricity 
usage associated with central air-conditioning. Feedback consisted of 
giving the homeowners a percentage score which informed them 
whether they were consuming electricity at a rate greater than, less 
than, or equal to the rate predicted for them on the basis of their own 
previous month's consumption. Conservation achieved by providing 
homeowners with daily, weather-corrected feedback was about 10.5 
percent. 

The other experiments involved variations on the basic feedback 
theme. In the second one, consumers were either given a difficult specific 
goal to reach in terms of conservation (i.e., reduce energy consumption 
by 20 percent) in addition to the feedback or an easy goal (i.e., reduce 
energy consumption by 2 percent) . Homeowners given the difficult goal 
plus feedback reduced consumption 13.4 percent compared to the con- 
trol and 4.6 percent for the easy goal group. The other two experiments 
dealt with different types of feedback (e.g., feedback comparing it to 
other peoples consumption data, their own consumption in another 
time period, in terms of the physical characteristics of the house). 
Results here were much more equivocal than the other two, although 
the feedback did show some positive effect. Overall, results supported 
the theory that feedback helps homeowners reduce energy consumption, 
but the optimal nature of the feedback system had yet to be identified. 
In addition, the procedures used thus far were not feasible on a large 
scale since we had assistants sent on foot to homes to read meters, 
compute feedback and mark charts. 

At this stage, CMB was now ready to test, in cooperation witli 
Potomac Electric Power Company (PEPCO), the effectiveness of a 
relatively simple device which would automatically provide home- 
owners with immediate information about their home's energy con- 
sumption. In addition, running concurrently with this test, research 
and development of a more sophisticated, multi-function feedback 
de\ ice is being done by the Department of Energy's (DOE) Consumer 
Products and Technology Branch. 

OBJECTIVES 

The purposes of the experiment using the energy monitor are (1) to 
test whether a simple, one function device which instantaneously dis- 
plays projected hourly electricity cost will be effective in helping 
families conserve energy and (2) to find out what practical difficulties 



355 



may arise in doing this t} T pe of real world test with a utility, for 
example : 

— utility support and reactions 

— customer response/level of inquiries 

■ — installation and maintenance costs 

— data collection 

FITCH ENERGY MONITOR 

The Fitch Energy Monitor, developed by R. B. Fitch, an energy 
conscious builder/developer in North Carolina, is being used in this 
test. The device is commercially available at this time, although 
this wil] be the first controlled test of its effectiveness. It provides a 
display in cents-per-hour of total household electricity use (to tenths 
of a cent), i.e., ''Your electricity cost for the next hour will be $0,742 
if 3*011 continue to use electricity at your present rate." If the consumer 
then plugs in his dishwasher, the cost will immediately jump to a 
higher figure (e.g., $0,953). The device also serves as a conventional 
digital clock. It alternates time of day and cents-per-hour at 4-sec- 
ond intervals. The Fitch Energy Monitor will be placed in the home- 
owner's kitchen. 

This particular feedback device was chosen for a number of reasons. 
A primary one is consumer cost. While the monitor is not currently in 
mass production and therefore sells for $125, mass production could 
bring down the cost to the consumer to around $25. The payback pe- 
riod is then likely to be less than one year. Other, more sophisticated 
meters are being developed, but this is probably the most cost effective 
for the consumer at this time. Other reasons for choosing the meter 
were the immediacy of the data and the continual reminder to the 
consumer that energy is being used in the home at virtually all times. 

OVERVIEW OF THE TEST 

DOE is providing the feedback devices, the research and evaluation 
support (through Princeton University) and coordination with other 
ongoing efforts for the experiment. PEPCO is in the process of in- 
stalling and will maintain the feedback devices and monitor electricity 
consumption of the participants in the study. Based on what is learned 
in the test, a larger scale demonstration involving several utilities and 
perhaps a more sophisticated device will be developed for implemen- 
tation in fiscal year 1978. 

Participants and Design : With PEPCO's assistance, 140 families 
were selected based on a stratified random sample of customers from 
the PEPCO service area. These families were then randomly assigried 
to either the feedback group or the control group (seventy families 
each). The subjects in each group represent a broad demographic pro- 
file of PEPCO customers, especially in terms of income. All partici- 
pating families have been visited by a Princeton researcher and a 
PEPCO engineer who fully explained the details of what the cus- 
tomer's involvement will be and provided educational materials on 
how to most effectively conserve energy. The test will begin this fall 
and will run for one year, since the long term effectiveness of such a 
feedback device is of major interest. 



356 



Data Collection : PEPCO is also in the process of installing a de- 
mand meter in the homes of all families participating in the^ study 
(both feedback and control) which will monitor amount and time of 
electricity use on a continual basis. This will enable us to assess the 
effectiveness of the feedback in reducing overall electricity consump- 
tion, and also determine the impact of this type of feedback on the 
utility load profile. 

In addition, homeowners' efforts to save energy and reactions to 
such factors as the device itself, the utility role, and the costs of energy 
will be monitored during the study and documented. 

CONCLUSION" 

The overall objective of the CMB is to encourage private sector 
groups such as financial institutions, retail merchants, and utilities to 
voluntarily work with DOE to test and evaluate approaches which the 
private sector could later implement to motivate consumers to become 
more efficient users of energy. Funding for such projects undergo com- 
prehensive review as well as project evaluation by the Planning 
Analysis and Evaluation Branch. Projects are evaluated according 
to the following : 

— National energy impact 

— Public cost 

— Private cost 

— Cost-sharing 

— Economic benefits 

— Technical and institutional feasibility 

It is felt that the concept of instant energy cost feedback has the 
potential to help achieve national energy savings by cost effective 
means. The results of our study next j^ear will determine exactly what 
kind of impact may be expected, and will determine future courses in 
this area of energy conservation. 



CONSUMES PRODUCTS EFFICIENCY AND LABELING 

PROGRAM 

(By R. Nelson DuRant, Jr., Senior Program Analyst, Office of Consumer 
Products, Department of Energy (DOE)) 



This afternoon, I would like to provide you with an overview of 
the DOE ? s Consumer Products Efficiency and Labeling Program. I 
will be discussing the legislative requirements of the Energy Policy 
and Conservation Act (EPCA) as they pertain to the consumer prod- 
ucts program, our accomplishments to date, the legislative require- 
ments remaining to be implemented along with a timetable for com- 
pletion, and other issues inherent in the program. I will also address 
program changes that will occur if the National Energy Act passes 
in its present form. 

The Consumer Products Program is mandated by title III, part B 
of EPCA, which was passed on December 22, 1975. The primary 
objective of the program is to reduce energy consumption in the house- 
hold sector by improving the operating efficiency of major household 
consumer products. This objective, translated into energy savings, 
amounts to a reduction of energy consumption in the year 1985 of ap- 
proximately 200 million barrels of oil equivalent per year. 

Under the existing legislation, DOE, working in conjunction with 
the Federal Trade Commission (FTC) and the National Bureau of 
Standards (NBS), is tasked to address four major program objec- 
tives. These are : test procedures, energy efficiency improvement tar- 
gets, consumer product labeling, and consumer education. 

There are 13 covered product categories specified in the EPCA. 
Under requirements of EPCA, energy efficiency improvement targets 
for the first 10 product types must achieve an aggregate energy ef- 
ficiency improvement of not less than 20 percent by 1980 over like 
products manufactured in 1972. This will be discussed in more detail 
later in the presentation. 

Turning now to the four major program elements, Section 323 of 
EPCA requires that test procedures be developed which are designed 
to measure the energy efficiency of a consumer product and to provide 
a determination of an estimated annual operating cost during a rep- 
resentative average use cycle. NBS has the responsibility for develop- 
ing the initial test procedures and making recommendations to DOE. 
Test procedures for most product types are different from those used 
by industry in that they are required to measure energy efficiency and 
energy consumption during a typical average use cycle. For some prod- 
uct types such as television sets, the representative average use cycle 
is nothing more than the number of hours per year a television oper- 
ates which is 2,200 hours or 6 hours a day, or for clothes washers, the 

(357) 



358 



number of cycles per year a clothes washer is operated, which is 416. 
For other products, such as air-conditioners and furnaces the task is 
not quite as simple. For these type products that cycle on and olf 
during typical operation, the efficiency varies as a function of the per- 
centage of on and off time. A unit that operates only a small fraction 
of the time will have a lower efficiency (in some instances signifi- 
cantly lower) than a unit that operates a larger percentage of the 
time. The maximum efficiency of these products occurs at full on con- 
ditions. An example may be helpful to illustrate this point. A furnace 
tested in a furnace test laboratory under current industry standards 
will have a typical efficiency of about 75 to 80 percent. But under 
actual operating conditions in a house, cycling on and off, this same 
furnace may only be 50 to 60 percent efficient. Designing test pro- 
cedures to adequately measure these part load effects is only part of 
the problem, because on the other side of the coin. DOE is required 
to design test procedures which are not unduly burdensome to in- 
dustry. This balance has not been easy to achieve. 

As of today, test procedures for all 13 product types have been pro- 
posed, and final test procedures have been promulgated for 10 of the 
products: room air-conditioners, dishwashers, refrigerators and re- 
frigerator-freezers, freezers, clothes dryers, water heaters, television 
sets, clothes washers, central air-conditioners, and humidifiers and de- 
humidifiers. 

Section 325 of EPCA requires the development of energy efficiency 
improvement targets for each product type listed in the act. NBS is 
again responsible for determining the targets and recommending them 
to DOE. These targets are to be the maximum that are both technologi- 
cally and economically feasible. The aggregate energy efficiency im- 
provement for products 1 through 10 manufactured in 1980 must ex- 
ceed the efficiency level of like products manufactured in 1072 by not 
less than 20 percent. 

But only the aggregate improvement of all 10 product types must 
exceed the 20 percent requirement. For example, the target for home 
heating equipment is 9 percent, whereas the target for television sets is 
a 79-percent efficiency improvement. Individual product targets are an 
average improvement. Room air-conditioners, for example, has a pro- 
posed efficiency improvement target of 30 percent. This means that the 
room air-conditioner industry as a whole must improve efficiency levels 
by an average of 30 percent. Some products may only improve 20 per- 
cent and others may improve by 40 percent. The target is an industry- 
wide average goal. 

These targets are considered voluntary in that there are no require- 
ments for. an individual manufacturer to achieve the target. If, how- 
ever, during the course of product improvement it is determined that 
the industry is not likely to meet the voluntary average targets, pro- 
ceedings would commence to establish minimum efficiency standards. 
These standards are already around the corner and will be discussed 
later on in the discussion on the pending National Energy Act 
LegislaJ ion. 

To date, proposed efficiency improvement targets for all 13 product 
types have been published and public hearings completed. DOE is 
currently reviewing and analyzing comments, however, final targets 



359 



will not be promulgated if the NEA is enacted prior to the Christmas 
recess as anticipated. 

The Federal Trade Commission has the responsibility for adminis- 
tering the labeling portion of the program under section 324 of EPCA. 
The FTC is responsible for publishing labeling rules and designing 
and issuing the labels which manufacturers will affix to the products. 
The label will be designed so that the information displayed will be 
easily understood by the consumer. The basic information to be pro- 
vided on the label will be typical annual operating cost during a repre- 
sentative average use cycle. A range of operating costs of other brands 
of similar sized products will also be provided so that a consumer can 
judge if he or she is purchasing a product that is near the minimum 
operating cost (high efficiency model) or the maximum operating cost 
(a low efficiency model). Other useful information that may also be 
provided on the label are : efficiency ratings, costs by geographic region 
for air-conditioning and heating products, and variable costs resulting 
from energy price variations and certain usage patterns. The FTC con- 
tracted with several independent research firms to perform human fac- 
tors studies to determine what information is most useful to the con- 
sumer and what level of understanding the average consumer can be 
expected to reach in interpreting a label. The preliminary results of 
these studies have led to the sample labels which have recently com- 
pleted field testing. It should be pointed out that these are preliminary 
and do not necessarily reflect what the final labels will look like. 

The FTC's current schedule is to publish a proposed rule sometime 
in the latter part of December. FTC anticipates the publication of a 
final labeling rule in the spring of 1978 with labels following in the 
marketplace in mid-1978. 

The fourth major element of the program, and possibly the most im- 
portant, is the consumer education portion of the program. Section 337 
of EPCA requires that DOE develop a consumer education program 
to operate in conjunction with the other key elements of the Consumer 
Product Efficiency and Labeling Program. DOE is currently develop- 
ing a consumer education program which will address the significance 
of annual operating costs and their relationship with life cj^cle costs 
and the first cost of the product. The consumer education program will 
also address the way in which a consumer can most effectively compari- 
son shop with the help of energy labels to obtain the best buy for his 
needs. 

DOE is currently working with numerous groups : Manufacturers, 
distributors, retailers, consumers, plus State, local and other Federal 
Government agencies. An important group that will receive consider- 
able attention is the Nation's homebuilders. For several of the product 
types, namely, furnaces, air-conditioners and water heaters, the prin- 
cipal purchasing agent is most often the builder. The consumer, in 
general, does not have much to say (or in the past shown much interest) 
as to what type of furnace, water heater or air-conditioner is installed 
in a new home. Builders have typically installed low efficiency appli- 
ances commonly referred to as "the builders special." I believe that with 
a concentrated education effort in this area, not only will the builder 
have more and better information at his disposal, but the consumer 



360 



will also be more educated in what to look for and ask for in new house 
construction. 

DOE is also developing television and radio public service announce- 
ments to inform the public how to operate existing consumer products 
in a more energy conserving and cost saving manner. Some of these 
announcements will be aired over the coming weeks and months. 

NATIONAL ENERGY ACT 

I would now like to briefly talk about the pending; legislation result- 
ing from the President's National Energy Plan. One portion of the 
National Energy Act deals specifically with the efficiency of household 
consumer products. This provision in the act deletes authority for the 
target program and requires the establishment of minimum efficiency 
standards. Under the minimum efficiency standard program, every 
product manufactured will have to meet or exceed a minimum efficiency 
standard. This type of efficiency program will require extensive anal- 
ysis in order to set meaningful standards that will achieve energy 
conservation and still allow industry to manufacture without major 
disruptions. The staff must study the engineering technologies avail- 
able to produce more efficient products and the economic impact of the 
standards. These analyses must include: (1) the projected energy 
savings to result from each standard, (2) the savings in operating costs 
over the life of the product compared to any increases in initial cost or 
maintenance costs which are likely to result from imposition of the 
standards, (3) any lessening in the utility or performance of the prod- 
uct, (4) any negative effects on competition likely to result from the 
imposition of standards, and (5) other relevant factors. 

Other elements of the legislation provide that standards for 9 prod- 
ucts be finalized by 1980 and that the remaining 4 product standards be 
issued by 1981, allow standards to be set by fuel type and by classes 
within a product type, provide exemption for small manufacturers for 
2 years, and allow for standards to be set on products in addition to the 
13 listed under certain conditions. Given all of the requirements the 
number of standards issued could be as high as 70 to 100. 

The difference in the potential energy savings between the 1985 and 
1995 figures stem from the fact that by 1985 only a small number of 
existing home appliances will be replaced by the more efficient prod- 
ucts. On the other hand, by 1995, it is assumed that the majority of 
existing home appliances will be replaced by the more efficient prod- 
ucts, since the maximum average life of most appliances is about 15 
years. The number of barrels of oil equivalent savings will progres- 
sively increase, year by year between 1985 and 1995, as the more 
efficient products are added to the appliance population. 

The last program I would like to mention is the Appliance Retrofit 
Program. This program primarily concentrates on devices that can be 
installed on existing residential furnaces and water heaters. 

Our major effort to date has been in the area of automatic flue or vent 
gas dampers. DOE is working with the ANSI Z21 committee, and other 
organizations in the development of a standard for the electrical type 
dampers. This standard should be published in the very near future. 



361 



In closing, we believe that the Appliance Efficiency and Labeling 
Program is important and will make a major contribution to the 
Xatioms conservation effort. We are also keenly aware that the key to 
public acceptance and support of the program is a good, sound con- 
sumer education program which reaches every segment of society. To 
this end, we at DOE solicit your support in helping to disseminate this 
important energy conservation message to the public. 



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UNIVERSITY OF FLORIDA 



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3 1262 09115 1661 



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